European leaders will be thinking about the possibilities of an EU-wide carbon border after the European Parliament vote last week cleared the plan for the next stage. If the carbon border adjustment mechanism goes ahead, it will come into force on October 1.
Governments must decide whether they will support the carbon border tax regime. Carbon borders represent a break with the free trade ideals of globalisation, but this may be necessary to address the most pressing issue of our time – climate change.
Carbon taxes and pricing regimes have become the norm in many countries. The EU’s Emissions Trading Scheme saw rates rise to €100 ($110) per tonne this February, from €20 per tonne in 2021.
A carbon border mechanism would build on this foundation and raise barriers to carbon-intensive industry outside the EU from trading with the bloc. Naturally, critics of the CBAM outside the EU see it as another form of protectionism.
The US government may just add the CBAM to its list of complaints with the European Commission. US companies have long felt discriminated against by EU state aid law and European countries levying digital taxes.
There may be more than a grain of truth in this claim, but the accusations of protectionism go both ways. French and German politicians have raised concerns about the US tax credits for electric vehicle production.
Nevertheless, a world of carbon borders is better than the alternative and such barriers could complement green tax credits. Free trade at the expense of our future is hardly a wise policy.
Fault lines
The CBAM has come a long way since it was drafted in 2021 with the aim of carbon neutrality by 2050. It would raise the costs of carbon-intensive imports, such as cement, hydrogen, iron and steel, to reduce carbon emissions by 55%.
Although the border mechanism is planned to come into effect in October 2023, this would be a transitional period lasting until the system becomes permanent on January 1 2026. Companies can expect more reporting requirements and higher costs just for compliance.
This border regime will raise the cost of carbon-intensive imports, putting a lot of countries outside the EU at a disadvantage. These include fossil fuel export nations such as Russia and Saudi Arabia, but also emerging economies like China.
However, it’s a difficult time to be passing on the cost of pollution to consumers. This is a hard sell for governments at a time of high inflation even though such inflation means carbon taxes raise more revenue.
The main opposition to the CBAM in the European Parliament came from French Greens, who were concerned about the fallout for working-class households. France has seen major protests over its attempts to implement a fuel tax – and now faces even greater opposition over pension reform.
At the same time, French politicians might be more likely to support a CBAM because nuclear power makes up 75% of its energy mix and the country is far less dependent on oil and coal than other EU member states.
Many EU governments will be torn over the increased cost of high-carbon imports. The Netherlands has seen the rise of the Farmer Citizen Movement, which opposes measures to curtail the use of certain chemicals in agriculture.
Some EU member states such as Hungary and Poland tend to oppose fiscal reform across the economic union, but this time even the biggest European economy has reasons to doubt a carbon border tax.
Unlike France, Germany has turned away from nuclear power and returned to coal. The country depends on Russian imports of natural gas and coal as part of its energy strategy. This has put Germany in a very difficult spot since Russia invaded Ukraine in February 2022.
Meanwhile, the UK might end up with a carbon border of its own just for the sake of aligning its standards with the world’s biggest trade bloc. Even after Brexit, the UK government has to consider its position with the EU.
So, EU leaders may be likely to try and find a compromise on a carbon border. This is a turning point for Europe and the rest of the world.
