EU Responds to Biden with Carbon Border Tax

    Stockholm (NordSIP) – Following the European Commission’s presentation of its ‘Fit for 55 in 2030 package‘ in the middle of July 2021 and the adoption of a Negotiating Position by the European Council at the end of June 2022, one of the centrepieces of the proposal, a EU carbon border tax, seems to finally be on its way.

    According to an announcement made by the European Parliament on Tuesday, December 13th, it has reached a provisional agreement with Council to set up an EU Carbon Border Adjustment Mechanism (CBAM) to combat climate change and prevent carbon leakage.

    “CBAM will be a crucial pillar of European climate policies. It is one of the only mechanisms we have to incentivise our trading partners to decarbonise their manufacturing industry. On top of this, it is an alternative to our current carbon leakage measures, which will allow us to apply the polluter pays principle to our own industry. A win-win situation,” said rapporteur Mohammed Chahim (S&D, NL) (Pictured), after the deal.

    The details, scope and motivations of the deal are historic. It is after all the first such carbon border tax and a crucial part of the ‘Fit for 55 in 2030 package’ that aims to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels in line with the European Climate Law. While CBAM has been moving along the EU’s legislative process for almost 18 months, it is worth considering whether recent green developments across the pond might not have given the EU legislators the necessary incentive to wrap up this process expediently.

    The Carbon Border Adjustment Mechanism (CBAM)

    According to the announcement, the CBAM will aim to equalise the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) and the one for imported goods. Companies that import into the EU will have to purchase so-called CBAM certificates to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS.

    It also appears that the new rules will exempt countries with the same climate ambition as the EU from buying CBAM certificates. The EP’s announcement claims that the CBAM is designed to be in full compliance with World Trade Organisation (WTO) rules. It will apply from 1 October 2023 but with a transition period where the obligations of the importer shall be limited to reporting.

    To avoid double protection of EU industries, the length of the transition period and the full phase in of the CBAM will be linked to the phasing out of the free allowances under the ETS. This will be negotiated later this week in connection with the revision of the ETS and the results integrated into the CBAM regulation.

    The Scope of CBAM

    CBAM will cover iron and steel, cement, aluminium, fertilisers and electricity, as proposed by the Commission, and extended to hydrogen, indirect emissions under certain conditions, certain precursors as well as to some downstream products such as screws and bolts and similar articles of iron or steel.

    Before the end of the transition period the Commission shall assess whether to extend the scope to other goods at risk of carbon leakage, including organic chemicals and polymers, with the goal to include all goods covered by the ETS by 2030. They shall also assess the methodology for indirect emissions and the possibility to include more downstream products.

    The governance of CBAM will become more centralised, with the Commission in charge of most of the tasks.

    A Response to USA?

    It is perhaps not entirely unreasonable to see in this institutional EU agreement to move the CBAM forward as a response to the recently signed Inflation Reduction Act (IRA) by the Biden Administration in the USA.

    As the name implies, the main focus of the legislation is to fight inflation, by lowering “prescription drug costs, health care costs, and energy costs”. Most importantly, the White House notes that “it is the most aggressive action we have taken to confront the climate crisis,” including an estimated US$369 billion investment in energy security and climate change.

    According to that announcement, the “legislation targeted tax incentives aimed at manufacturing U.S.-sourced materials like batteries, solar, and wind parts, and technologies like carbon capture systems and electrolyzers to make hydrogen. The legislation also includes key requirements around domestic sourcing—for example, for use of domestic steel in wind projects—and around prevailing wage and apprenticeships to ensure we create good-paying jobs.”

    At the time, EU leaders were quick to react. “Some large foreign companies that wanted to set up in Europe are now hesitating between European and American sites,” said finance minister Bruno Le Maire. “In some cases, the amount of grants the Biden administration is offering is four to ten times the maximum amount allowed by the European Commission,” the French minister added before calling for a “coordinated, united and strong response from the European Union vis-à-vis our American allies.”

    EU Internal Market Commissioner Thierry Breton echoed these concerns, warning that these facts might cause the  EU to have recourse to the WTO as the IRA might discriminate against EU automotive, renewable, battery and energy-intensive industries.

    The Path Ahead

    This partial deal is dependent on an agreement on the reform of the EU Emissions Trading System. Parliament and Council will have to formally approve the agreement before the new law can come into force. The new law will come into force 20 days after its publication in the EU Official Journal.

    By the end of 2027, the Commission will do a complete review of CBAM including an assessment of progress made in international negotiations on climate change, as well as the impact on imports from developing countries, in particular the least developed countries (LDCs).

    Image courtesy of European Parliament
    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

    Latest Posts

    NordSIP Insights Handbook

    What else is new?