Carbon Border Adjustment Mechanism

December 22, 2022

The European Union (EU) member states and parliamentarians announced a landmark reform within the bloc’s carbon market on December 18, 2022. This reform serves as the central plank in the EU’s ambitions to reduce carbon emissions and invest in climate-friendly technologies. The deal includes provisions such as accelerated emission cuts, phase-out of free allowances to industries, fuel emissions from the building and road transport sectors, and much more. The initiative that stands out the most is the carbon border tax, which marks itself as the world’s first major move aimed at making the economy carbon-neutral by 2050.

The Carbon Border Adjustment Mechanism (CBAM), also known as the carbon border tax, adds a pollution price on certain imports to the EU. This measure makes it necessary for carbon-intensive industries to comply with stricter emission standards. While the CBAM is considered a significant step towards tackling harmful emission rates, many countries, including the United States, China, India, Brazil, South Africa, and least-developed countries, have expressed concern over the EU’s carbon border tax.

What Is The Carbon Border Tax?

A carbon border tax (CBT) is a duty placed on imports based on the amount of carbon emission that results from the production of the product in question. It places a conscious price on carbon as a measure to discourage emissions. However, from a trade-related perspective, many have argued that it would affect production and exports. The idea of CBT has been discussed widely by experts for years, and they have explored the trade risks that could tag along with the taxes. Many claimed that it could become a protectionist device, unduly shielding local industries from foreign competition in so-called ‘green protectionism’. There are also measures proposed to hold back incentives for companies under the bloc that would move production to more tolerant countries with weaker regulations, something that EU lawmakers refer to as “carbon leakage.”

Under the agreement, companies would have to buy certificates that contain information on emissions generated during the production of goods imported into the EU. These calculations would be based on the EU’s carbon prices, and the quantity of free emissions allowances will be phased out between 2026 and 2034. The carbon border tax would first be applied to industries such as iron, steel, cement, aluminium, fertilisers, electricity production, and hydrogen before being extended to other goods.

Peter Liese, the lead negotiator for the European parliament, conveyed through a statement that the deal would be a huge step towards fighting climate change at low costs. The European Parliament and Council are yet to formally approve the deal before it comes into force in 2026.

Part Of A Larger Plan To Tackle Climate Crisis

The carbon border tax is just the tip of the iceberg for a wider deal that reforms the EU carbon market to cut its emissions by 62% by 2030, up from the previous goal of 43%. The EU Carbon Market already caps greenhouse gas emissions from over 11,000 power and manufacturing plants, internal EU flights, and some 500 airlines. For electricity producers and industries with high energy demands, the system offers the purchase of “free allowances” to cover the emissions under the “polluter pays” principle, which can subsequently be traded.

These provisions were key to the EU’s bid to become the world’s first carbon-neutral continent, but it has slowly been finding support from other blocs. For example, negotiators from member states and the parliament have been engaging in intense discussions for over 24 hours regarding the widening of the scope of the EU Carbon market.

Switching to greener technologies and designing quotas to encourage industries to emit less is part of the EU’s larger mission of achieving net neutrality in carbon emissions, reported the New York Times. The carbon border tax is an important part of this mission, as it incentivizes companies to reduce their carbon emissions in order to avoid paying the tax.

Carbon Border Tax Controversy

While the carbon border tax has been praised as a significant step towards achieving the EU’s climate goals, it has also faced criticism and controversy. Many countries, including the United States, China, India, Brazil, South Africa, and least-developed countries, have expressed concern over the tax. These countries argue that the carbon border tax could lead to protectionist measures and unfairly disadvantage their industries.

There are also concerns that the carbon border tax could lead to a trade war, as countries may retaliate with their own tariffs on EU imports. Additionally, there are fears that the tax could lead to “carbon leakage,” where companies move their production to countries with weaker regulations in order to avoid paying the tax.

Summary

The carbon border tax, which is part of the EU’s wider plan to reform its carbon market and achieve net neutrality in carbon emissions by 2050, has been met with both praise and criticism. While the tax is seen as a significant step towards tackling the climate crisis, it has also faced concerns over its potential impact on trade and the risk of protectionist measures and carbon leakage. The EU Parliament and Council are yet to formally approve the deal before it comes into force in 2026.

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