International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Opinion: EU’s CBAM may be necessary break with globalisation

Concept: price tag for co2 emissions. Carbon tax. Composite image of a pricetag with a Euro sign attached to funnel of thermal power plant. Fumes emitted. Weed in the foreground, sun flares.

The European Parliament may have only just approved the carbon border adjustment mechanism, but the next step could see EU member states argue for watering down this historic reform.

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.

more across site & bottom lb ros

More from across our site

The General Court reverses its position taken four years ago, while the UN discusses tax policy in New York.
Discussion on amount B under the first part of the OECD's two-pronged approach to international tax reform is far from over, if the latest consultation is anything go by.
Pillar two might be top of mind for many multinational companies, but the huge variations between countries’ readiness means getting ahead of the game now, argues Russell Gammon, chief solutions officer at Tax Systems.
ITR’s latest quarterly PDF is going live today, leading on the looming battle between the UN and the OECD for dominance in global tax policy.
Company tax changes are central to the German government’s plan to revive the economy, but sources say they miss the mark. Ralph Cunningham reports.
The winners of the ITR Americas Tax Awards have been announced for 2023!
There is a ‘huge demand’ for tax services in the Middle East, says new Clyde & Co partner Rachel Fox in an interview with ITR.
The ECB warns the tax could leave banks with weaker capital levels, while the UAE publishes guidance on its new corporate tax regime.
Caroline Setliffe and Ben Shem-Tov of Eversheds Sutherland give an overview of the US transfer pricing penalty regime and UK diverted profits tax considerations for multinational companies.
The result follows what EY said was one of the most successful years in the firm’s history.