Europe manages three scenarios to approve a tax on CO ₂ from third countries

The European Commission is studying three possible scenarios for the design of the Carbon Border Adjustment Mechanism (CBAM), better known as the _CO2 tax on the import of products from non-EU countries. It does not seem easy, but it must fit in with Community and international trade legislation. It will be negotiated and enter into force in November 2023.

The three options are the introduction of a general import tax, an excise tax on emission-intensive goods and the third is to link that tax to the _CO2 market.

The study that will evaluate the impact of each of these options is scheduled to be published in May 2021, as advanced by the European _CO2 market consultancy Vertis.

One of the key risks of climate policy, both for the environment and for the economy, is _CO2 emissions. And for that reason, one of the measures that has become the most useful is that of that emission rights market that penalizes those who pollute the most, but can also cause carbon leakage.

These leaks are mainly the protagonists of energy-intensive industries. They are harmed because they tend to have an intensive consumption of fossil fuels and therefore, emit a lot of _CO2, in addition to the pollutants that are produced in the manufacturing processes, and are harmed. They have to pay to issue which makes their products less competitive in prices compared to third countries.

This is the case of electro-intensive industries such as Alcoa, which has been closing its factories in Asturias and Galicia to open them in Saudi Arabia, for example. There it produces without any restrictions and then brings its production to Europe.

A gradual tax

In the EU, the use of carbon tariffs on imports from non-EU countries has gained momentum as a proposed solution to the problem of complying with the Paris Agreement, but also because there is a comparative grievance between eponymous industries.

It is fair to expect the CBAM to face significant implementation hurdles in the coming years. From the perspective of efficiency, equity and technical challenges, it is reasonable to assume that the process towards its full implementation will be gradual and onerous.

But the determination to approve this measure is absolute in the European Commission. The creation of a CBAM was identified in the European Green Deal as a means to help with the transition to a greener and more sustainable economy.

Dangers of the tax

According to expert sources, the most likely approach would be to test its use with a small set of imported products that are emissions-intensive, but easy to manage and simple to produce.

But this CBAM must be built in a fair and efficient way that can help you avoid any intentional or plausible conflict with WTO (World Trade Organization) law and unnecessary disruptions to production value chains.

China, in particular, appears as a country that would be hit hard by tariffs if implemented ambitiously. It supplies Europe, among others, with steel. Retaliatory countermeasures could easily eliminate any economic benefits from tariffs.

Another country that would not welcome this tax either is Russia, known for its supplies of hydrocarbons. The introduction of the carbon footprint adjustment mechanism may cost the Eurasian giant billions of euros, but on the other hand, it could also force it to decarbonise.

Therefore, the latest documents with which the European Commission works foresee offering an alternative to foreign partners. It will not impose these burdens if “its climate ambitions are the same as Europe’s”.

Intensive industry

“It’s a matter of survival for our industry,” said Frans Timmermans, Vice-President of the Commission. “We must protect the European Union against distortions of competition and the risk of carbon leakage.”

And one of those industries is closely tied to the energy transition. New renewable technologies or electric mobility will need, yes or yes, materials that are produced in the primary industry.

This is the case of batteries for electric vehicles, which are mainly manufactured in China. The global demand for battery cells is expected to grow exponentially in the coming years. The EU can play an important role in meeting this growing demand, but it needs the import of these products.

The situation is complicated. In the coming months, the details of the proposals that Europe has on the table will be known.

Source: The Spanish