The European Union plans to impose carbon emission costs on imports of goods, including steel, cement and electricity, according to leaked documents obtained by EURACTIV.
The European Commission is due to propose its carbon border adjustment mechanism on July 14, a move designed to put EU firms on an equal footing with competitors in countries with weaker carbon policies.
The leaked documents show the proposal will take the form of a regulation setting up a carbon border adjustment mechanism authority, with the measure being phased in from 2023 and a full implementation from 2026.
It would apply to steel, iron, cement, fertilisers, aluminium and electricity, according to the documents, which spells out a methode for calculating embedded emissions in imported products.
It will cover both direct emissions – those involved in the production “which the producer has direct control over, including emissions from the production of heating and cooling consumed during the production process” – and indirection emissions such as “electricity consumed during the production process of goods”.
Johanna Lehne, from climate think tank E3G, said she was not surprised by the plans.
“The European Commission has been drip-feeding the general outline for months. What we have is a pretty limited tool oriented towards managing domestic interests over external and climate considerations,” she said.
“It focuses on a handful of sectors, free allocation is being maintained for an unspecified period raising the risk of this being interpreted as double protection, revenues reserved for the EU budget,” she added.
Importers will need to provide data for imported goods, including “a unique identifier assigned by the CBAM authority,” the type and quantity, country of origin and what calculation has been used.
Importers would be required to buy digital certificates, with each one representing a tonne of carbon dioxide emissions embedded in their imported goods.
The price of the certificates will be linked to the cost of permits in the EU carbon market and based on the average price of auctions of EU carbon permits each week.
The European Commission declined to comment.
What countries will be covered?
According to the document, the carbon border tariff will not apply to countries within the customs union – Iceland, Liechtenstein, Norway and Switzerland. Nor will it apply to EU overseas territories.
If countries have similar carbon pricing to Europe, the tariff would also not apply. But countries with high climate ambition, like the US and the UK, are not automatically exempt.
The poorest countries, however, could get an exemption, EU climate chief, Frans Timmermans, told EURACTIV in an interview in May.
“In real trade terms, the impact will mainly be felt by EU Neighbourhood countries,” said Lehne. “However, that does not foreclose the possibility that trade partners won’t still react strongly just on symbolic terms. In short, it’s going to be a big political lift without all that much to show for it in terms of climate action.”
Each year, by the end of May, importers will be requested to report the amount of emissions embedded in the goods they imported into Europe in the previous year, plus the number of border levy certificates that they surrendered.
EU power plants and industrial facilities are required to buy permits from the EU carbon market to cover their emissions. The permit prices have soared to records this year and on Thursday was trading at €52 per tonne of CO2.
The European Commission has said that countries whose climate policy ambitions match those of the EU may be able to dodge the border fee.
There are still plenty of concerns about the proposal, including the lack of detail on the pace of the phasing out of free allowances under the EU ETS.
Phasing out free allowances “is a necessary condition to the mechanism’s WTO compatibility,” said Pascal Lamy, a former EU trade commissioner and director of the World Trade Organisation. However, the European Parliament voted against scrapping free allowances earlier this year.
Another concern relates to the use of revenues from the levy, which is another key element in the system’s WTO compatibility, Lamy said.
“CBAM is not and should not be seen as a fiscal measure to repay the European recovery plan. It is first and foremost a climate measure and as such, its sole objective must be to reduce global greenhouse gas emissions,” he warned.
“On this point, we recommend that the additional revenues generated by CBAM be used to finance international funds to support the climate transition in developing countries,” Lamy said.
CBAM Regulation Draft
[Edited by Frédéric Simon]