Draghi flags risks for EU plan to tax carbon beyond its borders

Europe’s bold plan to put a price on imported carbon emissions carries risks that may render it ineffective, according to former European Central Bank president Mario Draghi.

The European Union needs a successful Carbon Border Adjustment Mechanism to ensure a level playing field with global rivals in the transition to net zero, Draghi said in a long-awaited report requested by the European Commission chief Ursula von der Leyen. Yet its complex design and reliance on global partners raise doubts about its implementation, potentially requiring the EU to modify its rules.

“While CBAM is an important instrument for European companies to stay competitive against their international peers that face lower or no carbon prices, its success is still uncertain,” he said.

The idea of imposing a carbon levy, put forward as part of the EU Green Deal in 2021, has already triggered a hostile reaction from trading partners including Russia and China, and added to tensions over green subsidies with the US. The CBAM kicked off last October with a data-collection stage, which will be followed by a gradual phase-in of tariffs for imported goods and phase-out of free carbon allowances for EU emitters from 2026.

“The EU should closely monitor and improve the CBAM design during the transition phase and consider postponing the phase out of the Emissions Trading System free allowances for energy-intensive industry if implementation is ineffective,” Draghi said.

Key risks associated with the measure include the challenge of ensuring uniform implementation, the possibility of circumvention and shifting imports to downstream products not covered by the regulation. Additionally, CBAM impacts only the import side and doesn’t level the playing field for exporters, who will face a cost disadvantage, according to the report.