Greening industrial imports by charging for the carbon emissions linked to their production: the EU has adopted an unprecedented mechanism at its borders, which should also signal the end of the free “rights to pollute” allocated to European manufacturers.
Commonly referred to as a “border carbon tax” although not a tax per se, this unprecedented scheme will apply the criteria of the European carbon market to imports from the EU-27, where EU manufacturers are required to buy allowances to cover their polluting emissions.
With the price of a ton of CO2 skyrocketing, the idea is to avoid “ecological dumping” which would see manufacturers relocate their production outside Europe, while encouraging the rest of the world to adopt European standards.
This “border carbon adjustment” device (CBAM in English) “will be a crucial pillar of European climate policies to encourage our trading partners to decarbonize their industry,” says MEP Mohammed Shahim (S&D, Social Democrats).
In practice, the importer will have to declare the emissions linked to the production process, and if these exceed the European standard, acquire an “emission certificate” at the EU CO2 price.
If a carbon market exists in the exporting country, it will only pay the difference.
“The message to our industries is clear: there is no need to relocate because we have taken the necessary measures to avoid unfair competition” by ensuring “fair treatment” between European producers and imported goods, observed Pascal Canfin (Renew, Liberals), chairman of the Environment Committee in Parliament.
Here are the terms of the agreement reached between the negotiators of the Member States and the European Parliament after long nightly negotiations:
Sectors concerned
The mechanism, which will be administered mainly centrally at the EU level, will target the sectors deemed to be the most polluting (steel, aluminum, cement, fertilizer, electricity), as proposed by the European Commission.
The MEPs have obtained to add hydrogen, some by-products (bolts…), and Brussels will have to study the possible extension to organic chemistry and polymers (plastics).
The system will take into account “indirect” emissions (generated by the electricity used for production).
The expected revenues, which could exceed 14 billion euros annually, will be fed into the general EU budget.
Calendar
A test period will begin in October 2023, during which importing companies will simply have to report their obligations.
The timing of the actual start-up will depend on talks later this week on the rest of the European carbon market reform.
The Commission and the Member States are defending a gradual application of the mechanism over ten years starting in 2026.
MEPs are calling for a gradual implementation between 2027 and 2032.
Free quotas
Currently, European manufacturers are allocated free allowances covering a portion of their emissions, to support their competitiveness against foreign competitors.
As the “border adjustment” is ramped up, the free allowances distributed to the sectors concerned will be phased out.
A crucial point: by treating imports and local production equally, Brussels believes it is staying within the rules of the World Trade Organization (WTO) and countering accusations of “protectionism.
But the hard-fought timetable for phasing out free allowances will not be addressed until Friday and Saturday in the carbon market reform talks.
“The regulation on CBAM can only be formally adopted after these other elements have been resolved,” the European Council warns.
Export aids
Another controversial point still to be negotiated: the Parliament wants European industrial sites, under certain conditions, to continue to receive free allowances for their production destined for exports to non-EU countries.
European manufacturers are concerned that their exports will lose competitiveness because of the price they have to pay for their emissions and the heavy investments they will have to make to decarbonize, while they are already suffering from soaring energy costs.
States remain reluctant to accept any “export rebates”, which could be incompatible with WTO anti-subsidy rules.
The CBAM is “the culmination of a thirty-year-old idea, but it only makes sense if all free allowances are abolished,” observes Geneviève Pons, Director General of the Europe Jacques-Delors Institute.
Alternatively, it advocates that the revenues of the mechanism be used to help developing countries to decarbonize.
