Carbon Border Tax emerges in EU as weapon to protect green deal

The first glimpse is emerging of a levy the European Union is drawing up to ensure its Green Deal environmental rules aren’t undone by nations with weaker standards.

The measure being drafted by the EU’s executive arm will penalize the greenhouse-gas pollution produced by factories outside the region that ship their products into Europe. The so-called Carbon Border Adjustment Mechanism is meant to ensure that domestic industries most at risk from stricter climate policies aren’t hurt by the Green Deal.

Designing a carbon border tax that both works and complies with World Trade Organization rules is a major challenge. The European Roundtable on Climate Change and Sustainable Transition, a research group in Brussels, consulted lawmakers, EU trading partners and affected industries and set out its outlook in a major study of the options policy makers could adopt.

It expects a price should be put on imports of emissions-intensive goods, exemptions to be granded for the poorest nations and funds raised by the levy diverted to help pay for Europe’s green economic recovery.

“The mechanism will require a broader framework and is no silver bullet on its own,” said Andrei Marcu, one of the authors of the study published by the European Roundtable on Climate Change and Sustainable Transition. “Starting in 2024-2025 we could see some sort of a pilot program. I hope it will be a weapon that the EU will never have to use.”

For the EU, the mechanism could be a way to hit two birds with one stone: protecting its industry while prodding other regions to move ahead with similar climate action. Policy makers are aware they risk opening a new source of international trade tensions with the levy at the same time that the coronavirus pandemic is taking a toll on the economy.

The 27-nation bloc is seeking to tighten its 2030 emissions-reduction target to 55% from 1990 levels. The existing goal, agreed only in 2014, is a cut of 40%. That would have a big impact on industry.

“Europe is moving on emissions, and it can’t do that without an instrument that addresses competitiveness,” said Aaron Cosbey, co-author of the study. “The commission will just need to find a balance where it works politically and economically.”

The most probable design of the border adjustment would encompass extending the EU Emissions Trading System into imports of selected products, such as cement and electricity, according to the study. As the number of free pollution permits Europe hands out to some companies in the market is set to shrink, the carbon levy could gradually be phased-in to replace them.

Some other features of the mechanism could also include:

• exemption of Least Developed Countries
• using average carbon intensity of EU producers as benchmark to determine emissions embedded in imported goods
• gradual phase-out of free carbon allowances in EU ETS
• crediting non-EU countries for carbon-pricing policies
• using revenue from the levy for EU budget
• levy would cover basic materials and electricity

A draft measure on how to enact the levy is due to be unveiled by the EU executive next year. The new charge is at the heart of the green agenda promoted by European Commission President Ursula von der Leyen. It has also been backed by the European Parliament and many national governments as a new source of revenue to the bloc’s budget.

“We are likely to underestimate the complexities and remaining uncertainties, but for better or for worse the train has left the station and the EU will go ahead with the proposal,” said Michael Mehling, who co-authored the study.