Europe is close to finalizing the world’s first carbon border adjustment tax, after a marathon negotiating session that ended at 5 AM Tuesday.
The deal has other countries, like Canada and the United Kingdom, considering their own carbon adjustment plans, Politico Europe reports.
The preliminary deal “is intended to help European industries avoid being undercut by cheaper goods made in countries with weaker greenhouse gas emission rules,” Politico explains in its Power Switch newsletter. “The proposal has already upset supply chains around the world and rankled EU trading partners, including U.S. manufacturers that worry the plan will make it more challenging to export goods to Europe. High-emitting developing countries in particular have expressed frustration.”
The carbon border adjustment mechanism (CBAM) is “a key part of the EU’s Fit for 55 program that aims to cut CO2 emissions by 55% by the end of the decade and the Green Deal that plans for the bloc to be climate neutral by 2050,” Politico explains. “The idea is that producers importing carbon-intensive products into the bloc will have to buy permits to account for the difference between their domestic carbon price and the price being paid by EU producers,” at a time when a tonne of carbon costs a bit more than €87 on the EU’s Emissions Trading System (ETS), but nothing in the U.S.
In Canada, this year’s floor price on carbon is C$50 (€34.55), with scheduled increases set to bring it to C$170 in 2030.
Politico Power Switch has details on how the EU plan will work.
“Companies importing products such as cement, steel, iron, fertilizer, and hydrogen would be required to buy certificates to cover all the carbon dioxide emissions associated with those goods, such as their production and transportation,” the newsletter states. “Notably, the provision includes indirect emissions, or the carbon pollution from the electricity used to manufacture the imported goods. The bulk of emissions from certain goods, such as aluminum, comes from the huge amounts of electricity used in production.”
Pascal Canfin, chair of the European Parliament environment committee, said the CBAM covers sectors responsible for 55 to 60% of the EU’s carbon footprint. “It’s a global first… there is no equivalent in the world,” he said. “That’s why we need three years to start implementing it.”
The tax is expected to take full effect in 2026, Politico writes. At first, importers will have to report but not pay for the carbon footprint of their goods. By the end of that transition phase, the European Commission will consider whether the CBAM should be extended to all imports by 2030.
The news story cites two remaining technical issues—the time frame for phasing out free credits for polluting industries, and the design of export rebates—that will be the subject of “tough talks” coming up Friday and Saturday. And climate groups are pushing to prevent the CBAM from harming developing countries that are already being severely shortchanged by a continuing lack of international financing for climate action.
Power Switch notes that the CBAM deal also coincides with “heightened trade tensions”, with EU leaders concerned that buy-North American provisions in the U.S. Inflation Reduction Act put them at a competitive disadvantage.