A carbon border tax announced by the European Union aims to launch in 2023, raising 10bn euros a year. But the climate-change measure has been criticised by trading partners, including China, Russia and the US, and could even face challenges through the World Trade Organization.

The tax – officially a carbon border adjustment mechanism – unveiled by the European Commission will initially be imposed on iron and steel, aluminium, cement, fertilisers and electricity in a transition phase scheduled to be soft-launched from 2023. However, it could be extended to other sectors after full implementation in 2026.

Importers will be taxed on the carbon emissions embedded in their goods, based on the EU carbon price that is set.

The mechanism is a key component of the EU’s Green Deal and its 2050 carbon-neutrality pledge. It aims to increase climate ambitions and discourage carbon-intensive European companies from moving operations outside the bloc to avoid EU climate rules. It would also protect selected European industries from foreign competitors that are not subject to stringent climate policies.

The carbon border adjustment mechanism should be one of the most effective and strongest instruments for promoting multilateral decarbonisation and climate ambitions, outside the EU as well as within. It is the world’s first carbon tariff policy and is expected to kick-start a series of domestic and international discussions and debates. However, its implementation will be challenging and economically impactful.

The European Council and parliament are expected to give approval but the proposal is complex and controversial, so the target timeline of launching the transition phase is likely to be subject to delays.

There are also cost impacts on those EU sectors that heavily rely on imports covered in the mechanism, including construction and the car industry. Foreign suppliers might pass the carbon cost onto their European customers, squeezing profits or increasing prices.

However, not only is the mechanism expected to raise about 10bn euros a year for the EU’s budget, it should incentivise more countries to tighten their own climate policies and consider similar initiatives to protect their domestic industries in response to the European move. Already, Canada, Japan, the UK and US are examining the feasibility of introducing a carbon border tax.

First published 15th July 2021.

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