Europe reaches historic deal to put a pollution price on imports

European Union policymakers reached a landmark deal to slap an emissions levy on some imports, in an attempt to ensure the bloc’s green overhaul doesn’t leave its industries at a disadvantage.

After hours of late-night negotiations, EU governments and the European Parliament thrashed out key details of the so-called Carbon Border Adjustment Mechanism. The idea is that carbon-intensive industries forced to comply with Europe’s world-leading climate laws won’t face unfair competition from producers operating in countries with weaker rules.

The EU’s plans have already caused diplomatic unease in nations such as China and India, and there’s concern that Russia may not comply. The move comes amid growing tensions over a major US climate package offering subsidies to American manufacturers — seen as putting European counterparts at risk.

“Of course, CBAM will have an impact on our trade partners, because it’s designed to,” Pascal Canfin, chair of the EU Parliament’s environment committee, told reporters at a briefing on Tuesday in Strasbourg, where the talks took place on the sidelines of the assembly’s plenary sitting. “It’s important that the EU leads on the connection between climate and trade policies.”

The idea of putting a price on emissions at the border has been floated in the region over the past two decades but it wasn’t until in 2021 that the European Commission put forward a draft regulation. The measure effectively means that goods imported into the EU from a high-polluting country will face a levy at the border based on its emissions footprint. The proceeds will largely go into the EU’s budget.

“It’s a very strong message to the rest of the world and I can’t imagine that other regions will not follow a similar mechanism,” said Mohammed Chahim, lead negotiator for the parliament on the measure. 

The preliminary agreement among negotiators will need the endorsement of ministers from national governments and the full parliament to enter into force. But first policymakers need to iron out a deal on another draft law — a deep reform of the EU carbon market. Talks on that issue are due to take place Friday and Saturday.

The Emissions Trading System overhaul is closely linked to CBAM because it will spell out how and when to phase out emissions allowances that sectors covered by the emissions levy currently get for free to avoid relocation to countries with laxer climate policies. It will also decide how to treat exporters covered by the ETS, as their competitiveness may be at risk when they send goods to countries without carbon pricing. 

The CBAM will also include indirect emissions under certain conditions. The commission will assess the methodology for such pollution before the end of the transition period. The measure covers carbon-intensive sectors such as cement, steel, aluminum, fertilizers, electricity production, and hydrogen. Reporting requirements will start in October 2023, as part of a gradual phase-in.