The EU’s effort to become climate neutral is kicking into high gear — as of Sunday the bloc’s carbon border tax enters a trial period, which is likely to raise tensions with key trading partners.
The Carbon Border Adjustment Mechanism — or CBAM — was adopted last year with the aim of ensuring that goods manufactured in Europe, and subject to the EU’s Emissions Trading System, which sets a price on carbon emitted, will be able to withstand competition from products made in countries where polluting doesn’t come with the same price attached.
Starting October 1, the EU’s trading partners will have to report the greenhouse gas emissions tied to their exports of iron, steel, cement, aluminum, fertilizer, hydrogen and electricity.
Initially, the requirement is just to report the emissions — although companies failing to do so face fines — the actual payments go into effect in 2026.
The point of the exercise is to both shield EU companies from unfair completion and to nudge other countries into setting their own price on carbon. Non-EU producers can deduct the cost of CBAM if they have their own domestic carbon tax.
“CBAM will encourage industry worldwide to embrace greener technologies,” EU Economy Commissioner Paolo Gentiloni said in a statement. “It will also prevent so-called carbon leakage, or the relocation of production outside our borders to countries with lower environmental standards.”
While the EU says this is a key part of its project to cut greenhouse gas emissions by 55 percent by the of the decade and to become climate neutral by 2050, the carbon border tax has caused an explosion of fury from key trading partners and concern that businesses aren’t ready for the paperwork requirements.
Slamming CBAM
The impact is likely to be the most severe on the EU’s biggest trading partners — Russia, China, the United Kingdom, Turkey, Ukraine, India, South Korea, and the United States, according to a report by the Carnegie Europe think tank earlier this year.
Brazil, South Africa and India, have all accused the EU measure of being “discriminatory.” New Delhi announced last week that it is planning its own carbon tax, taking particular aim at the EU’s exports. China has called on the World Trade Organization to assess the measure.
Australia has slammed the planned carbon border levy for harming global growth, while the U.S., which has no national carbon price, is seeking an exemption.
There is particular concern about the impact of CBAM on the U.K. The price of its own emissions trading scheme has collapsed to less than half the level of the EU ETS, meaning British exporters are likely to have to pay hefty fees to the EU.
There is also worry that some of the world’s poorest countries will be hurt by CBAM.
“The EU has been doing some outreach, but outreach alone is not enough — we’re still missing a constructive offer from the EU’s side, especially toward the most vulnerable countries, including related to capacity building or finance,” said Domien Vangenechten, a senior policy adviser with the E3G climate think tank.
Ukrainian businesses, however, will be exempted because of the war. A European Commission official confirmed that the legislation contains a “provision to tackle exceptional and unprovoked situations with destructive consequences on the economic and industrial infrastructure in a given country.”
Domestic fears
The bloc’s trading partners aren’t the only ones fretting about the impact of the border tax.
EU producers and trade associations are nervous about the risk of losing market share should countries like China and India retaliate.
Others are wary that the tax may be too easy to circumvent for non-EU businesses should penalties and monitoring prove too weak.
“The initial phase of the CBAM will test how watertight it is against carbon leakage towards countries that do not have equivalent climate legislation or carbon costs,” said Axel Eggert, director general of the European Steel Association, pointing out that “default values should be sufficiently high to incentivize operators importing the most polluting products to declare real data and so avoid free-riding.”
EU importers, meanwhile, will also take a hit thanks to higher costs and soaring red tape.
“European importers of CBAM products may find themselves in the position of having to provide extensive guidance, as their supply partners may lack familiarity with gathering data for carbon reporting,” said Anuj Saush from the Conference Board think tank.