Carbon Tariffs—Fair Incentives for Change?

Carbon credits, carbon taxes, and emissions trading systems are familiar terms in discussions about global warming, the Paris Agreement, and net-zero emissions goals. The EU is moving to act on an addition to the glossary of climate policy: carbon tariff.

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Carbon credits, carbon taxes, and emissions trading systems are familiar terms in discussions about limiting global warming, the Paris Agreement, and net-zero emissions goals. A more recent addition to the glossary of climate policy is “carbon tariff.”

While the concept is not new, it recently surfaced in nascent policymaking in the EU. In 2019, European Commission President Ursula von der Leyen proposed a “carbon border adjustment mechanism (CBAM)” as part of a proposed green deal. In March, the European Parliament adopted a resolution on a World Trade Organization (WTO)-compatible CBAM.

A carbon tariff, or the EU’s CBAM, is a tax applied to carbon-intensive imports.

Countries that have pledged to be more ambitious in reducing emissions—and in some cases have implemented binding targets—may impose carbon costs on their own businesses. Being eyed now are cross-border or overseas businesses that make products in countries in which no costs are imposed for emissions, resulting in cheaper carbon-intensive goods. Those products are exported to the countries aiming for reduced emissions.

The concern lies in the risk of locally made goods becoming unfairly disadvantaged against competitors that are not taking similar steps to deal with climate change. A carbon tariff is being considered to level the playing field: local businesses in countries applying a tariff can better compete as climate policies evolve and are adopted around the world.

Complying with WTO rules to ensure fair treatment, the CBAM will be imposed only on high-emitting industries that compete directly with local industries paying a carbon price. In the short term, these are likely to be steel, chemicals, fertilizers, and cement.

The Parliament’s statement introduced another term to the glossary of climate policy: carbon leakage. “To raise global climate ambition and prevent ‘carbon leakage,’ the EU must place a carbon price on imports from less climate-ambitious countries.”

It refers to the situation that may occur if businesses were to transfer production to other countries with laxer emission constraints to avoid costs related to climate policies. This could lead to an increase in total emissions in the higher-emitting countries.

“The resolution underlines that the EU’s increased ambition on climate change must not lead to carbon leakage as global climate efforts will not benefit if EU production is just moved to non-EU countries that have less ambitious emissions rules,” the Parliament said.

It also emphasized the tariff “must not be misused to further protectionism.”

A member of the environment committee, Yannick Jadot, said, “It is a major political and democratic test for the EU, which must stop being naïve and impose the same carbon price on products, whether they are produced in or outside the EU, to ensure the most polluting sectors also take part in fighting climate change and innovate towards zero carbon. This will give us the best chance of remaining below the 1.5°C warming limit, whilst also pushing our trading partners to be equally ambitious in order to enter the EU market.”

The Commission is expected to present a legislative proposal on a CBAM in the second quarter of 2021 as part of the European Green Deal.