The EU plans to implement the first border tax against the climate crisis

The European Union plans to introduce a tax on the import of steel, cement and aluminum produced in countries with lower environmental and climate standards than those in the EU. The EU pursues this goal to maintain its idea of becoming a world leader in the fight against warming but without harming domestic producers.

In a measure that no other country in the world has taken, the European Commission wants to impose a system that imposes a certain penalty on the import of goods that carry, in their processes produced, emissions of gases that are not taxed (unlike what happens in the EU, where large CO2 generators must pay fees for emitting these gases that heat the atmosphere).

This was indicated by an informant to the Bloomberg agency, although he preferred to remain anonymous, waiting for these proposals to be announced next month. The tax will be calculated based on the carbon costs already faced by domestic producers. Everything indicates that this tax will apply to other goods such as fertilizers and electricity.

European Emissions Trading System Certificates

According to the idea, importers will have to buy special emission reduction certificates linked to the EU emissions trading system, according to the same sources. Carbon prices in that market have soared to record levels this year, and this Monday reaches 51 euros per ton of CO2, according to Ismael Romeo, of the Sendeco platform. Emitting greenhouse gases is so expensive since large CO2 generators (especially the electricity system) tilt towards non-emitting technologies (object of the latest reform of the Spanish Government).

The planned measure is part of a broader package to be presented on July 14, which aims to align the EU economy with stricter emission reduction targets by 2030. The EU27 is tightening its rules in reforming its climate action plans with a review that will incorporate climate extra costs into new areas of activity (such as transport and energy production and trade). The overall goal of the Green Deal is for Europe to become the world’s first climate-neutral continent by mid-century.

Off the G7 agenda

EU leaders have repeatedly said, in their communiqués after summits of heads of state, that they would welcome a border levy mechanism. Still, the concreteness of the details of the so-called carbon adjustment mechanism at borders may spark lengthy debates within the bloc. The matter is not on the agenda of the G7 meeting, although a Bloonberg source said it could be discussed informally.

The EU wants to kill two birds with one stone: on the one hand, to ensure a level playing field in international trade transactions that avoid illegitimate competitions and encourage more climate action by countries outside the European bloc. But his plans are already known to be causing diplomatic unrest in countries that do not incorporate environmental costs into their products, such as Ukraine, China and India.

This planned levy comes just months before the crucial climate summit organised by the UK in Glasgow (next November), where the EU’s role may be key in dragging other major emitters to redouble their efforts with new climate action plans.

Controversial mechanism

If the proposal increases trade tensions with third countries, the border adjustment mechanism can be a bargaining chip in any case.

The EU has already learned a lesson on trade and climate when it tried a few years ago to implement the carbon market on flights outside Europe (to put a price on every tonne of CO2 emitted by aircraft).

But his plan provoked complaints and threats of retaliation from Brazil, the US, Russia and China, and the EU had to backtrack and reduce programme ambition, so that it only applied to flights internal to the EU, those born and die in the EU.

The opinion of the U.S., key

In the most optimistic scenario painted out by some EU analysts and diplomats, Europe’s plans would lead to the creation of a “club” of climate-leading countries on all continents. However, that would need the backing of the US administration, which has not yet decided what regulatory approach it will follow to reduce greenhouse gases.

The Commission is considering a transition period, so that it would run three years before the full entry into force of the aforementioned mechanism, something that could happen in January 2026, according to a draft proposal. Between 2023 and 2026 it could use a simplified system “with the aim of reducing the risk of disruptive impacts on trade flows and easing the initial administrative burden,” the proposal said. The revenue would go to the EU budget.

The energy industry has also called for the introduction of the aforementioned adjustment mechanism, but many companies want the tool to be a complement to the alternative to the free allowances they now get as a shield against carbon leakage. That is another sticking point that policymakers will need to address.

Given all the sensitivities, the draft regulation may still change even before it is adopted by the Commission in July. Once submitted, it will have to be approved by the European Parliament and member states to become law. That process involves negotiations that can last up to two years.

According to the draft, importers in the affected sectors will have to purchase electronic emission certificates regulated and approved by emissions trading (the program that sets ceilings on annual allowances in the EU). Each mechanism certificate shall correspond to one tonne of emissions embedded in the imported goods.

The high cost of allowances

The cost of emissions on the EU carbon market has increased tenfold over the past four years (as the abundance of allowances available by the Commission’s policies has been reduced), as the EU strengthened the programme by stepping up climate action. Reference permits to issue rose to an all-time high of 56.90 euros on May 14 and ended the day at 51.40 euros on Wednesday.

Before they were so cheap, that many doubted their effectiveness.

The price of the adjustment mechanism certificates will be set by setting the average closing prices of all government carbon permit auctions during each week, according to the draft.

Exceptions, the risks of not presenting them

“In the event that actual emissions cannot be properly verified, including cases where the authorised declarant has not submitted the necessary information, the number of certificates to be delivered will be determined according to the default values,” the Commission notes in the draft. which can still change before publication.

If the embodied emissions originate in a country where a carbon-pricing system is already in place, the importer would be entitled to claim a reduction in the number of certificates to be delivered. Such an application would have to be in line with a special carbon price certification scheme which the commission will design separately.

Importers will face a penalty for non-compliance with the regulation, according to the draft. They will have to pay three times the average price of certificates in the previous year for each certificate they have not delivered.

Source: The Vanguard