In July 2021, the European Commission did something no other major governing body had ever attempted: it tied trade policy to climate policy. Achieving the European Union’s target of reducing net greenhouse gas emissions by 55% by 2030 will require the EU to reduce its emissions both inside and outside its borders. To that end, the Commission’s Fit for 55 initiative, a set of proposals aimed at meeting the bloc’s emissions reduction target, includes a Carbon Border Adjustment Mechanism (CBAM) – an import tax designed to inspire other countries to fight climate change.
The CBAM would tax imported goods sold in EU markets on the basis of their carbon content – the emissions needed to produce them – which depends on their material and energy inputs. The proposed tax aims to tackle so-called carbon leakage, which occurs when EU companies move production to non-member countries with less stringent emissions rules.
In other words, Europe would no longer ignore the climate effects of foreign goods. But while the measure could help reduce emissions and level the playing field for EU-based companies, the trade protectionism it entails risks hurting developing countries.
The CBAM will initially apply to the industries most emitting and most exposed to the risk of leaks – steel, cement, fertilizers, aluminum and power generation – and will probably be extended to other sectors in the years to come. . Currently, products made in the EU in these industries are taxed under the internal carbon price, but those outside the bloc are not. If a country already has an internal carbon price, the border tax will be lowered or removed; this aims to encourage countries to tax carbon in their own markets. Those unable or unwilling to institute a carbon tax will have to pay the full tax.
The European tax will be phased in over the next four years. By 2023, importers will be required to report the emissions embedded in the goods they import, although the tax on these emissions will not be imposed until 2026. The billion euros ($1.1 billion) expected annual revenue from the CBAM, together with the expected €9 billion annual revenue from the EU Emissions Trading System from 2023 to 2030 and taxes on multinational companies will support the recovery fund of the Union in the event of the COVID-19 pandemic, worth €750 billion. These new sources of revenue will for the first time integrate EU priorities – including the green transition – into the EU budget.
Although not yet approved, the proposed tax is already influencing the decisions of policymakers and businesses in EU trading partners. For example, Turkey and Indonesia plan to introduce carbon taxes to mitigate the effects of CBAM on their economies. Turkey is highly exposed, as the EU accounts for 41% of its exports. Indonesia exports billions of euros worth of palm oil and chemicals to the EU – goods that could fall under a wider border tax. Adopting a national carbon price will allow them to avoid all or part of the CBAM and retain tax revenues instead of transferring them to the EU.
By helping to fund the developing world’s green transition, the EU could mitigate the protectionist threat in its own climate agenda.
Meanwhile, some EU-based companies in sectors such as computer hardware are looking to relocate manufacturing operations ahead of the introduction of CBAM. Their primary motive reflects not so much the cost of the tax as the likely complexity, bureaucracy and unpredictability of the system. It is easier and cheaper for companies to relocate their production to the EU and avoid the administrative obstacles that the CBAM could create.
Such changes will benefit the EU economy and environment. And Russia’s invasion of Ukraine could accelerate EU efforts to achieve greater economic self-sufficiency, including by reducing its dependence on energy-intensive Russian iron and steel imports. .
But developing economies, which often rely on manufactured goods, are likely to experience relocation of activity as companies relocate to the EU. Rather than just tackling carbon leakage and letting developing countries adapt as best they can, the EU should allocate some of the revenue from the proposed CBAM to help foster a just green transition for the poorest countries.
It is neither easy nor cheap to decarbonise energy-intensive goods like cement and steel. But the EU could prevent negative ripple effects for developing economies – not just by waiting for low-income countries to introduce their own carbon taxes, which will be a challenge given their limited administrative capacity in this field, but also by supporting those who need the most help to reduce their emissions.
Such support could be provided by devoting resources and technologies to improving the efficiency of industrial processes, financing renewable energy projects and exempting poorer countries from CBAM if necessary. The EU should also devote part of CBAM’s revenue to helping developing countries adopt cleaner technologies – to produce greener cement in Vietnam or chemicals in Indonesia, for example – and thus reduce long-term emissions. term.
Europe sees itself as a global leader in the race to net zero emissions. By helping to fund the developing world’s green transition, the EU could mitigate the protectionist threat in its own climate agenda.
Miriam González Durántez is an international trade lawyer and visiting lecturer at Stanford University. Calli Obern, a master’s candidate in international politics at Stanford University, is a research fellow at Ecospherics, a consulting firm specializing in environmental and national security issues.