European Union governments have reached a deal on the world’s first major carbon border tax, as part of an overhaul of the bloc’s flagship carbon market that aims to make its economy carbon-neutral by 2050.
EU ministers finalized details of the Carbon Border Adjustment Mechanism early Sunday after reaching a provisional agreement earlier on in the week.
The landmark measure adds a pollution price on certain imports to the European Union. Carbon-intensive industries inside the bloc must comply with strict emissions standards, and the tax is designed to ensure those businesses are not undermined by competitors in countries with weaker rules.
The measure will apply first to iron and steel, cement, aluminum, fertilizers, electricity production and hydrogen before being extended to other goods.
It also disincentivizes EU companies from moving production to more tolerant countries, something that EU lawmakers refer to as “carbon leakage.”
Under the new mechanism, companies will need to buy certificates to cover emissions generated by the production of goods imported into the European Union based on calculations linked to the EU’s own carbon price.
Mohammad Chahim, a Dutch socialist politician who has led negotiations on the law for the European parliament, said in a statement that the measure will be a “crucial pillar” of European climate policies.
“It is one of the only mechanisms we have to incentivize our trading partners to decarbonize their manufacturing industry,” he added.
But the plan has been met with resistance by countries including the United States and South Africa, which are worried about the impact that carbon border taxes could have on their manufacturers.
“There are a lot of concerns coming from our side about how this is going to impact us and our trade relationship,” US trade representative Katherine Tai said at a conference in Washington last week, according to the Financial Times.
The European Union and the United States have already butted heads over President Joe Biden’s $370 billion climate plan under the Inflation Reduction Act, which EU officials say will hurt European companies selling into the US market.
In a nod to the challenge posed by the Inflation Reduction Act, the latest EU deal makes more money available for the development of clean energy technologies in Europe.
The EU carbon measure could lead to a “rapid deindustrialization” of African countries that export to the European Union, warned Faten Aggad, a senior adviser on climate diplomacy at the African Climate Foundation.
Another risk is that clean energy capacity in poorer countries will simply be shifted to the production of exported goods while industry aimed at local consumption relies on dirty fuels, Aggad said on Twitter. She added that certifying carbon emissions in producing countries remains a “challenge.”
Climate policy overhaul
The carbon border tax is part of a wider deal agreed to Sunday that reforms the EU carbon market to cut its emissions 62% by 2030, compared to 2005.
The EU carbon market, known as the Emissions Trading System (ETS), already caps greenhouse gas emissions from more than 11,000 power and manufacturing plants, as well as all internal EU flights, covering some 500 airlines.
Companies receive or buy emission permits or “allowances,” which can subsequently be traded. The ETS, which on Sunday was extended to shipping, is key to the European Union’s bid to become the world’s first carbon-neutral continent.
Under the latest reforms, the quantity of free emissions allowances will be phased out between 2026 and 2034. The Carbon Border Adjustment Mechanism will be phased in at the same time, in that way protecting domestic firms from being undercut by foreign competitors.
After almost 30 hours of talks, negotiators also agreed to launch a new carbon market for heating and transport fuels starting in 2027, with the option to delay that by one year if energy prices remain at current high levels.
“This deal will provide a huge contribution towards fighting climate change at low costs,” Peter Liese, lead negotiator for the European parliament said in a statement. The deal will “provide a clear signal to European industry that it pays off to invest in green technologies,” Liese added.
The European Parliament and European Council will have to formally approve the deal before it comes into force in 2026.