EU carbon border levy shaping up as ‘notional ETS’

A Tata Steel factory in IJmuiden, a small port city in The Netherlands. The cement, steel and chemical industries are often cited as likely candidates for the EU’s upcoming carbon border charge. [MyStockVideo / Shutterstock]

Revenues from the European Union’s upcoming carbon border charge will be “recycled” to replenish the EU budget and finance the bloc’s green transition, senior officials have said. However, this won’t be the main goal, they cautioned, saying the new levy must pursue environmental objectives to comply with WTO rules.

The European Commission’s proposal for a “carbon border adjustment mechanism” will be tabled in June, as part of a wider package of laws aimed at cutting the EU’s emissions by 55% below 1990 levels before the end of the decade.

“It’s a matter of survival for our industry,” said Commission climate chief Frans Timmermans during an online debate last week, adding that Europe will impose the levy on non-EU competitors unless they commit to lowering their emissions.

Timmermans said the goal is to avoid the risk of “carbon leakage,” whereby companies relocate manufacturing abroad to countries where pollution costs are lower.

Although there is little evidence of carbon leakage to date, “the risk is real,” said Mauro Petriccione, director general at the Commission’s climate action department.

“And as we strengthen our climate ambition, that risk grows,” the official told an online event organised on 14 January by AFEP, the French association of large companies.

EU sees carbon border levy as 'matter of survival' for industry

The European Union’s proposed carbon border charge is essential to the survival of its own industries and the bloc will impose the levy on non-EU competitors unless they commit to lowering their emissions, the bloc’s climate policy chief said on Monday (18 January).

Patrick Pouyanné, CEO of French oil and gas major Total, said putting a carbon price on imported goods was “a very logical extension of the EU’s carbon price policy” and a necessary step to ensure a level playing field between EU industries and foreign competitors.

“It could be a protective instrument but also a proactive instrument in terms of reducing carbon emissions in other parts of the world,” he told participants at the event.

The stakes are high for Europe’s industry. According to a study by AFEP, the price of CO2 allowances on the EU carbon market are set to reach stratospheric levels in Europe as the EU tightens its climate goals, from around €30 per tonne of CO2 today, to around €40/t by 2030 and above €230/t by 2050.

Without a carbon border adjustment mechanism, EU industries would be beaten by foreign competitors in countries that do not have a similar carbon cost, Pouyanné argued.

Towards a ‘notional ETS’

Speaking at the AFEP webinar, EU official Mauro Petriccione gave more detail about the EU’s upcoming proposal, saying it will apply “to select sectors” of industry, with the aim of ensuring “that the price of imports more accurately reflect their carbon content”.

Foreign countries that want to avoid the charge don’t have to adopt the exact same policies as the EU, he said. “But they must have the same objective as ours” and “align policies and measures” with those of the European Union.

“In substance, not in words,” Petriccione stressed.

The cement, steel and chemical industries are often cited as likely candidates for the EU’s new carbon border charge because they are energy-intensive, exposed to international competition, and cannot easily switch their manufacturing processes to low-carbon electricity.

“It’s likely that we will start with raw materials” in order to gain experience, said Benjamin Angel, a senior official at the European Commission’s taxation directorate who also spoke at the event. “Because if you deal with complex products the level of complexity that you need to handle is higher,” he explained, adding that the system would later be extended to more complex supply chains.

The European Commission is currently conducting a cost-benefit analysis of the proposal, with two main options under consideration: a border tax and a “notional” carbon levy mirroring the EU’s emissions trading scheme, Angel said.

And according to Bernd Lange, a German lawmaker who chairs the European Parliament’s committee on international trade, the tax option has already been ruled out because it risks creating trade frictions that are likely to be incompatible with WTO rules.

This echoes earlier remarks by Pascal Canfin, a French MEP who chairs the Parliament’s environment committee. In an interview with EURACTIV, Canfin insisted that the new carbon border levy “is not a tax” but a charge imposed on imports that is the exact mirror of the carbon price on the EU ETS. Otherwise “it would risk being rejected by the WTO as protectionist,” he warned.

Angel seemed to agree with this, saying a key feature of the new carbon levy is to “avoid unintended protectionist effects” to ensure the carbon levy is WTO-compatible.

“With a notional ETS, you buy an allowance, it’s not a tax,” Angel said. “We would calculate a benchmark of carbon consumption for a given product corresponding to the EU average. When we import this product, we apply this benchmark and we multiply it by the ETS price as observed on the market,” he explained.

The only difference is that it would not be tradeable on the regular ETS market, Angel said, because the number of carbon allowances there is limited and “that would be a restriction to trade”.

Another difficulty, he said, is how the EU levy would apply to countries that have implemented carbon trading schemes at sub-national level, like California in the US.

For Canfin, however, the answer is quite simple: either the industries concerned are covered by a carbon trading system similar to the EU ETS, or they put in place an equivalent price in terms of emission standards.

Those are easily measurable, Canfin said. “For example, we can take the electricity mix of the country, that of the group targeted by the mechanism, or the electricity mix of the production site itself. That remains to be seen,” he told EURACTIV in an interview.

MEP Canfin: EU’s carbon border adjustment mechanism 'is not a tax'

The European Union’s future carbon border adjustment mechanism must mirror the EU’s own carbon market price and structure in order to be compatible with WTO rules, says Pascal Canfin.

Revenues will go back to the EU budget

Another key point for the future levy’s WTO-compatibility is how the money collected will be used.

For Pouyanné, “it is obviously very important” that the money is “recycled” and reinjected into investments aimed at greening the economy.

Petriccione confirmed this, saying the revenues will go back to the EU budget, where they will be used “to finance policies that support the investments needed for the transition to a climate neutral, modern and competitive economy”.

However, “this mechanism will not be an end in itself,” Petriccione cautioned, saying the objective is not to provide extra money for the EU budget but rather to ensure a level playing field between EU and foreign competitors.

Alan Wolff, deputy-director general at the WTO, said that would generally be acceptable under WTO rules, as long as certain conditions are met.

“If those duties go back into general revenues to support the EU in general, of course no problem,” he said at the webinar. “But if they go back and change the competitive equation for a particular industry or particular companies,” that would probably create “a fair amount of conflict,” he warned.

For example, recycling antidumping duties to compensate companies, like the US has tried to do in the past, was considered illegal by the WTO appellate body, Wolff said.

By contrast, “recycling for general environmental purposes – not for a particular sector, not directly changing the competitive environment internationally – might be just fine,” he said.

According to Canfin, either the duties are used to finance the energy transition in developing countries, or to support Europe’s own green transition.

“In the end, it will be necessary to find the right compromise between these two logics so that the mechanism is WTO-compatible,” Canfin said. “If the proceeds only go towards the EU recovery plan, without traceability, with no environmental objectives and without any returns to certain countries, especially the poorest, I think we have to be concerned,” he warned.

EU's carbon border tax proposal still has many grey areas

While the EU carbon tax should be introduced at the bloc’s borders by 2022, a report details the challenges and options of this mechanism, which still has many grey areas. EURACTIV France reports.

[Edited by Benjamin Fox]

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