Key Takeaways
On January 1, the European Union’s carbon border tax came into force, requiring importers of certain carbon-intensive products to pay a tax on the carbon emissions from the creation of those products.
Under the terms of the policy, importers of these products must declare the carbon dioxide emissions “embedded” in the products and pay a levy on the emissions that exceed EU standards.
The tax is intended to push countries to adopt their own carbon pricing systems since their exports are eligible for a deduction if they are already taxed by a carbon pricing system in their country.
The tax is also designed to prevent “carbon leakage,” which is when companies move production abroad to countries where less stringent climate policies are in place.
The United States warned that European climate rules could threaten the EU-U.S. trade deal that was struck in late July, establishing a tariff ceiling of 15% for most EU goods.
On January 1, the European Union’s carbon border tax came into force. The Carbon Border Adjustment Mechanism (carbon tariff) forces companies exporting aluminum, cement, steel, fertilizer, and other goods with a heavy carbon content into the EU to pay for their products’ carbon emissions. According to the European Union, the tax helps to level the playing field between EU countries with a strict environmental agenda and countries with more lax climate rules. China and India were displeased with the tax, which they see as protectionism despite it being billed in environmental terms. India is the world’s second-largest steel producer after China and exports as much as 66% of its output to the European Union.
The new EU policy is expected to push countries to adopt their own carbon pricing systems since their exports are eligible for a deduction if they are already taxed by a carbon pricing system in their country. The tax is also designed to prevent “carbon leakage,” which is when companies move production abroad to countries where less stringent climate policies are in place, and costs are lower.
Via RFI, under the terms of the policy, importers of these goods must declare the carbon dioxide emissions embedded in their products. If those emissions exceed EU standards, they must pay a levy on the difference. The purpose of the carbon tax is to ensure foreign producers pay a carbon cost similar to that paid by European companies under the EU’s internal emissions trading system. For the past four years, the price per metric ton of carbon dioxide emissions has fluctuated between €80 and €100. For more than 20 years, European producers in carbon-intensive industries have had to buy carbon permits if they did not reduce their greenhouse gas emissions to levels mandated by the EU. Foreign producers had not been subject to the same costs and standards.
The European Union has targets of a 55% reduction in carbon dioxide emissions by 2030 and a 90% reduction by 2040. To reach the targets, the EU must increase the price of carbon. The tax is expected to generate $2.4 billion in revenue by 2030. Because the number of products covered by the border tax is currently relatively small, the impact will be limited until the EU increases the number of products subject to the tax.
How Foreign Competitors Reacted
According to RFI, several of the European Union’s major trading partners have reacted to the bloc’s carbon border tax by strengthening their own climate policies, even as they publicly criticize the measure. China has expanded its carbon-pricing system, while Turkey has moved ahead with plans for an emissions-trading scheme after years of deliberation, and Japanese officials have cited the EU levy as a catalyst for advancing domestic climate rules. The United Kingdom and Canada are also exploring similar policies. Russia has filed a complaint at the World Trade Organization, arguing that the policy violates international trade law. Within Europe, industrial groups warn that foreign producers may under-report the emissions embedded in their exports, potentially eroding the system’s credibility.
As reported by CNBC, the United States has warned that European climate rules could threaten the EU-U.S. trade deal that was struck in late July, establishing a tariff ceiling of 15% for most EU goods from the start of August. The 15% rate was significantly lower than the 30% previously threatened by President Trump, but above the 10% baseline the EU had wanted. According to Energy Secretary Chris Wright, in the absence of significant modifications, the EU’s carbon tax would create “huge legal risks” for U.S. companies selling fossil fuels into Europe.
The Energy Network Media Group reports that an analysis of carbon tax suggested that the fees to be paid for U.S. imports would amount to $409 million annually under the tax’s current scope in a ‘business-as-usual’ scenario. The figure could increase to $1.4 billion if the tax is extended to include upstream, downstream, indirect emissions, and new sectors.
Global Emissions Involved in Trade
Global trade contributes between 20-30% of the world’s annual carbon dioxide emissions, according to the World Trade Organization. In 2015, around eight billion metric tons of carbon dioxide were emitted from the production and transport of trade, or around 25% of global emissions. In 2020, the iron and steel industry contributed around 7% of global greenhouse gas emissions, while the aluminum industry accounted for 3% of global emissions.
Analysis
The Carbon Border Adjustment Mechanism is a tariff implemented by the European Union under the guise of environmentalism and climate policy. Europe’s significant deindustrialization, resulting from high energy prices related to its policies, is forcing the EU to pursue this “beggar thy neighbor” approach with the aim of protecting domestic industries. Even if the tariff helps some industries, it will raise costs for Europeans and the world by discouraging the use of cheap and efficient energy sources. As IER’s Robert L. Bradley Jr. explains in Master Resource regarding carbon tariffs, “They are taxes to punish energy use. Since more than 80 percent of the world’s energy comes from coal, natural gas, and oil, which produce carbon dioxide emissions, a carbon tariff is a tax on the energy that makes modern life possible.”
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