In the early hours of Tuesday morning, the EU became the first major economy to introduce a “green tariff” on imports that will apply to goods produced with high carbon dioxide emissions.
The Carbon Boundary Adjustment Mechanism (CBAM) means that countries that fail to green their industries will soon face a new threat: an effective carbon tax that will penalize those who hope to profit from high-carbon activities, and forced them to clean.
The system will initially be used for iron and steel, cement, fertilizers, aluminium, electricity, hydrogen and some chemicals.
Jozef Síkela, the Czech Minister for Industry and Trade, who led the negotiations in the European Parliament, said: “The carbon cap adjustment mechanism is a key part of our climate action. This mechanism encourages the import of goods from non-EU companies into the EU that meet the high climate standards applicable in the 27 EU member states. This will ensure a balanced treatment of such imports and is intended to encourage our partners around the world to join the EU’s climate efforts.”
The agreement is still provisional, and member states and other institutions still need to iron out the details. But if everything goes according to plan, CBAM will be put into effect on a trial basis from next October.
However, initially there will be no financial or other penalties associated with the EU’s CBAM – companies will only have to report emissions related to the production of the goods they wish to sell.
Frans Timmermans, vice-president of the European Commission, told the Guardian: “We will ask many parts of our industry to undergo a remarkable transformation. If the other [countries] don’t do it – if they don’t meet what they have committed to under the Paris Agreement – the risk of CO2 migration is huge. You will see European industry moving elsewhere, where it does not have to meet strict norms to emit CO2 there. This would make our climate action useless.”
Pascal Canfin, chairman of the European Parliament’s environment committee, welcomed the move: “The agreement is a first in the world.” For the first time, we will ensure fair treatment between our companies who pay the carbon price in Europe and their foreign competitors who do not. This is an important step that will allow us to do more for the climate while protecting our businesses and jobs.”
The move, announced as part of the EU’s Green Deal, a major effort to meet the EU’s tough climate targets, could be the first salvo in a global carbon trade war – or the first step towards a just global effort to cut greenhouse gas emissions in line with urgent scientific tips. The US and UK are considering how to respond, but the countries most affected by Europe’s moves are likely to be those with high-carbon export industries such as China, Turkey, India and potentially Australia.
Russia faces its own sanctions and penalties based on its aggression in Ukraine, but could also be targeted by CBAM.
This move should also be seen in the context of the dispute between the EU and the US regarding the law on reducing inflation. President Joe Biden’s climate legislation contains hundreds of billions of dollars in incentives for green industries, seen by some EU member states as an aggressive move that could undermine the EU’s attractiveness for green investment.
The US said the EU should develop its own incentives. Without mentioning the US, Canfin made it clear that CBAM was also part of the EU’s response, saying the aim was to make Europe a “sovereign green power”.
While CBAM’s initial requirements will only apply to a few sectors, Canfin has made it clear that the EU Parliament has many more. “We have also taken care of the future integration of remanufactured products such as cars,” he said. “The message to our industry is clear: there is no need to migrate because we have taken the necessary steps to avoid unfair competition and CO2 migration.”
Camille Maury, senior policy officer for industrial decarbonisation at the conservation group WWF, said the agreement was “half-baked” and should be expanded to deal with free carbon dioxide production permits given to some companies under existing EU carbon trading scheme.
“The Interim Agreement on CBAM includes some good elements in terms of scope and emissions covered. Talks will now intensify on overlapping with free pollution permits granted to industry under the EU ETS [emissions trading system],” she said. “To act as a real alternative to anti-CO2 measures and to encourage EU industry to decarbonise, co-legislators will need to agree on a final endorsement of the ‘polluter pays’ principle by phasing out half of the free pollution allowances for CBAM sectors by 2030. , and completely by 2032. We should not give in to industry lobbying while we are in a climate emergency.”
Lord Stern, a climate and development economist, believes tariffs should be narrowly applied to certain high-carbon industries such as steel. Steelmaking has traditionally involved high consumption of fossil fuels, but some companies are switching to “green steel” using electric arc furnaces and, in some cases, hydrogen as fuel. Marginal carbon taxes on steel could spur the investment needed for more to follow.
“CBAMs need to be intelligent,” Stern said. “They must be simple in definition and operation and focused on a narrow group of relevant industries such as steel and cement. If you explain to other countries what you mean and that it will not be affected if they have the right policies, then you can have a constructive dialogue. But if you use them as blanket protectionism, it would be divisive. It is important to recognize that other countries may pursue sustainable growth and emissions reductions in different ways, and we should not insist that every country use a carbon price, despite the great value of this policy tool.”
A government spokesman said: “At home, as we move to net zero, the UK recognizes the importance of addressing the risk of CO2 leakage to ensure that our ambitious decarbonisation policy is not undermined. The government is considering a range of policies that could mitigate the future risk of CO2 migration. The government has committed to consulting on this, including whether measures such as product standards and the carbon cap adjustment mechanism could be appropriate tools in the UK’s policy mix, and will do so in the spring.”