The European Union has reached an agreement to impose a carbon border tax, i.e. a tax on imports based on their carbon dioxide emissions — on goods such as steel and cement aimed to support European industries as they decarbonize. The European Union is expected to adopt the rule as part of a larger package of legislation on climate change. The plan, known as the carbon border adjustment mechanism, would be the world’s first tax on the carbon content of imported goods. The ostensible purpose of the tariff is to prevent European industry from being undercut by less expensive goods made in countries that do not share the EU’s obsession with climate change and therefore have not adopted their draconian climate rules. Some details on the law, including its start date, are yet to be determined and will be decided in related negotiations on a reform of the E.U. carbon market. Other commodities that will be taxed based on their carbon dioxide emissions at the border include iron, fertilizers, aluminum and electricity. It will also apply to imported hydrogen.
How It Works
Companies importing those goods into the E.U. will be required to buy certificates to cover their embedded carbon dioxide emissions. The mechanism will apply the same carbon dioxide cost to overseas firms and to domestic E.U. industries – the latter of which are already required to buy permits from the E.U. carbon market. Currently, the E.U. gives domestic industry free carbon dioxide permits to shield them from foreign competition, but plans to phase out those free permits when the carbon border adjustment mechanism is phased in, to comply with World Trade Organization rules. In October 2023, companies would be required to report the greenhouse-gas emissions associated with its imports. In later years, importers would be required to pay the tax, which will accompany the E.U.’s schedule for phasing out free emissions allowances it gives to its industries under its cap-and-trade system.
The E.U. is including indirect emissions in its plan, which are released not by the manufacturers but from inputs to the plant such as electricity. For example, most emissions from aluminum production are generated by large amounts of electricity used by aluminum smelters. That provision could be a significant barrier to Chinese producers of aluminum and other goods because China relies heavily on coal-fired electricity. China produces about 60 percent of total world aluminum.
The legislation would require importers to register with authorities and seek authorization to import goods covered by the tax. Importers would have to pay a price per ton of carbon dioxide set by the carbon price in Europe’s emissions-trading system, which have risen over the past two years to around €90 ($95) per metric ton because of expectations that the E.U. would set a lower cap on overall emissions in the coming years. Higher carbon prices have also resulted from European electric utilities burning more coal to replace natural-gas supplies after Russia cut deliveries.
The E.U. plan has angered its trading partners, particularly in the developing world such as China where manufacturers tend to emit relatively large amounts of carbon dioxide. China, for example, produces as much carbon dioxide as the United States, EU27, Japan and India, combined. Manufacturers in the United States are also concerned that the measure would create a new web of red tape for exporting to Europe. It also comes over trade tensions with the United States due to the Inflation Reduction Act’s subsidies for “green” technologies, which the E.U. believes disadvantages European firms.
According to the E.U., countries could be exempted if they have equivalent climate change policies as the E.U. and suggested the United States could avoid the levy by doing so. Countries would need to set a price on carbon—either through a tax or other means such as a cap-and-trade system. Then, manufacturers from those countries would benefit from a deduction of that cost from the European tax when their goods arrive at the bloc’s borders. Officials in other countries (e.g. Canada and the U.K.) are considering a similar approach and Democrats in Congress have previously introduced legislation to impose a carbon tax at U.S. borders.
These fees and other devices are likely proof that the politically-correct renewable energy sources preferred by Europe produce more expensive energy than conventional fuels in the form of oil, coal and natural gas, which provided 82 percent of primary world energy in 2021, despite what politicians say. Otherwise, the E.U. would not seek to impose fees on others who are using the energy the E.U. says is more expensive.
The E.U. wants to cut greenhouse gas emissions by 55 percent by 2030 from 1990 levels. The energy sources they seek to restrict account for 82 percent of world energy use. However, E.U.’s current approach, with embargoes on Russian coal and seaborne oil and Russia’s cutbacks of natural gas supplies, is to use more coal, which is increasing rather than decreasing its carbon dioxide emissions. E.U. uses the Russian invasion of Ukraine as the reason for its increased coal use. But the reality is that low wind resources in Europe occurred before the war started and resulted in less wind generation, requiring more fossil fuel use because Europe’s approach to renewable energy is not providing the power it needs for industrial production and the comfort of its citizens.
But rather than owning up to that fact, the E.U. is now using its perceived might to get other countries to follow its lead by forcing them to pay carbon tariffs in order to export to E.U. countries, unless the exporting countries institute the same climate policies as the European Union. If exporting countries impose a carbon tax, they would get credit for the explicit tax that had applied to the production of their goods when selling the goods to European importers. If the tax is less than that of the E.U., the exporting countries would have to pay the difference.
Clearly, this border adjustment mechanism will be a major disruption to current global trade patterns, and drive up inflation by increasing costs of all goods. The disruption will be coming on top of the trade disruptions already resulting from the sanctions Western nations inflicted on Russia due to its invasion of Ukraine. Sadly, some U.S. politicians are proposing similar programs to make energy and the products it makes possible more expensive.