The European Union is proposing a carbon border tax on imports into the bloc to discourage EU businesses from moving to jurisdictions with less stringent carbon policies.

The proposal comes from the European Commission’s new president, Ursula von der Leyen, who has made a European Green Deal the first of her six key ambitions for the next five years. Her aim is to make Europe ‘climate neutral’ by 2050.

Neutrality does not mean no emissions: sources of greenhouse gases can be offset by sinks. The Green Deal would extend the current emissions-trading system and add a carbon border tax.

The tax is intended to prevent carbon leakage, which occurs when greenhouse-gas emitting activities move from one geographic area into another because restrictions have been imposed.

Restrictions are typically physical, such as emissions limits, or financial, including carbon pricing. But making it easier or cheaper to operate in places with fewer emission controls can lead to a loss in competitiveness, employment and tax revenues for those economies imposing the restrictions.

A carbon border tax deters firms from exporting their emissions or importing products or services produced in countries with less stringent controls.

The tax should lower emissions in the jurisdiction imposing it, but the whole global climate would also benefit from the reduction. It tries to ensure that businesses within the jurisdiction are not burdened with emissions-reducing policies that might make them less competitive. Companies in Europe could thus compete on a level playing field.

France and Germany officially backed a carbon border tax in September 2019. Ursula von der Leyen plans to detail her Green Deal within the first 100 days of her presidency, which means by 9 March 2020.

No implementation mechanism has been revealed but we expect a tariff or levy on goods in particular sectors imported from specific countries. The tax could be introduced in phases to most sectors already covered by the EU emissions-trading system.

The tax would apply to goods imported from outside the EU but also, potentially, from outside the European Economic Area, which is part of the EU emissions-trading system.

Individual EU member states could collect the tariffs but whether they keep the revenues for domestic use or pay them into a central EU budget is undecided. We expect pressure for the income to be applied to EU-wide sustainability initiatives or other measures to lower emissions within the bloc further.

Some businesses welcome the proposed tax because it maintains their competitiveness within the EU. But although the European Commission insists a carbon border tax would comply with World Trade Organization rules, the EU has previously faced issues with jurisdiction. Its 2011 plan for the emissions-trading system to cover flights landing from, or departing for, destinations outside of the bloc remains an issue, for example.

Opposition is also likely from some trading partners that have not implemented effective carbon-pricing mechanisms, including the US. China has already expressed concerns over ‘climate protectionism’.

With the carbon border tax and the whole Green Deal likely facing considerable scrutiny, it may be several years before it comes into effect.

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