The Carbon Border Adjustment Mechanism’s details, which are the world’s largest carbon border tax, were announced by the EU, but it still needs formal approval from the European Council and Parliament.
As part of an overhaul of the bloc’s centerpiece carbon market that seeks to make its economy carbon-neutral by 2050, the countries of the European Union have struck a deal on the world’s first major carbon border tax.
The ground-breaking policy increases the price of pollution on some goods into the European Union. The levy is intended to prevent competitors from nations with laxer regulations from undermining the bloc’s carbon-intensive industries, which are required to adhere to strict emissions standards.
Prior to being applied to other goods, the legislation will first apply to iron and steel, cement, aluminum, fertilizers, the production of electricity, and hydrogen.
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Additionally, it discourages EU companies from shifting their output to more accepting nations, a practice referred to by EU politicians as “carbon leakage.”
Using calculations based on the EU’s own carbon pricing, companies will be required to buy certificates to cover emissions caused by the manufacture of goods imported into the EU.
The rule will be a “crucial pillar” of European climate measures, according to Mohammad Chahim, a Dutch socialist politician who has led negotiations on it for the European parliament.
“It is one of the only mechanisms we have to incentivize our trading partners to decarbonize their manufacturing industry,” he added.
But nations like the United States and South Africa, who are concerned about the effect that carbon border taxes could have on their manufacturers, have opposed the concept.
“There are a lot of concerns coming from our side about how this is going to impact us and our trade relationship,” US trade representative Katherine Tai said at a conference in Washington last week, according to the Financial Times.
President Joe Biden’s $370 billion climate plan under the Inflation Reduction Act, which EU officials claim will harm European companies exporting into the US market, has already caused a rift between the European Union and the United States.
The most recent EU agreement increases funding available for the development of sustainable energy technology in Europe as a nod to the challenge presented by the Inflation Reduction Act.
Faten Aggad, a senior adviser on climate diplomacy at the African Climate Foundation, cautioned that the EU carbon measure could result in a “rapid deindustrialization” of African nations that export to the European Union.
Aggad remarked on Twitter that another risk is that clean energy capacity in developing nations would simply be moved to the production of exports while local industries rely on dirty fuels. Certification of carbon emissions in nations that produce them remained a “challenge,” she continued.
Climate policy overhaul
The EU carbon market will be reformed to reduce emissions 62% by 2030 compared to 2005 as part of a larger agreement reached on Sunday.
The Emissions Trading System (ETS), a carbon market in the EU, already regulates greenhouse gas emissions from more than 11,000 industry and power units as well as from all flights inside the EU, which include about 500 airlines.
Companies acquire or purchase “allowances”—permits for emission levels can then be traded. The European Union’s attempt to become the first continent to be carbon neutral depends heavily on the ETS, which was expanded to include shipping on Sunday.
The number of free emissions allowances will gradually decrease between 2026 and 2034 as a result of the most recent reforms. The Carbon Border Adjustment Mechanism will also gradually go into effect at this time, preventing domestic industries from being undercut by overseas competitors.
After nearly 30 hours of discussions, negotiators also decided to begin a new carbon market for transport and heating fuels in 2027, with the option to postpone that date by one year if energy prices stay high.
According to a statement from Peter Liese, the European Parliament’s lead negotiator, “this deal will provide a huge contribution towards fighting climate change at low costs.” The deal will “provide a clear signal to European industry that it pays off to invest in green technologies,” Liese added.
Before the agreement takes effect in 2026, it must receive formal approval from the European Council and Parliament.