The new EU tax on CO ₂ at the border threatens to unleash new trade wars

Russia, China and Turkey, among the main victims of Brussels’ initiative to accelerate emission reductions.

The European Union is preparing to create the world’s first _co2 border tax (CBAM), which will affect its main international rivals and threatens to unleash new trade wars. Russia, China or Turkey are the main victims of this initiative, whose main objective is to prevent the relocation of EU companies to countries with less demanding environmental rules than European ones.

The government of Pedro Sánchez is one of the strongest supporters of this initiative in Brussels to guarantee a level playing field for EU companies.

The _CO2 tax at the border is one of the main elements of the arsenal of measures (Fit for 55, in Brussels jargon) presented last week by ursula von der Leyen’s Commission to accelerate the fight against climate change and also the most controversial. The new legislation aims to ensure that the EU meets its target of reducing its greenhouse gas emissions by 55% by 2030 and reaches climate neutrality by 2050.

Why does Brussels see this carbon tax as essential? At present, the most polluting European industries are already subject to the EU emissions trading system. In practice, that means they have to pay for their _CO2 emissions. As part of Fit for 55, the EU Executive has proposed tightening emission limits, which will raise the price of _CO2 even further and should serve as an incentive to introduce clean technologies.

“But as long as industrial facilities outside the EU are not subject to equally ambitious measures, these efforts may lose their effect. That is why we need the new CBAM: an environmental policy tool that will equalize the carbon price between European products and imported goods for certain sectors,” says Commissioner for Economic Affairs Paolo Gentiloni.

How will this instrument work in practice? The CO2 levy will be based precisely on the emissions trading system. Importers who want to sell in the EU will have to pay the price of the carbon they emit when manufacturing their products according to the price in Europe. If they can prove that they have already paid part or all of the price in their home country, they will be deducted from the invoice. Iceland, Liechtenstein, Norway and Switzerland are exempt because they already participate in the EU emissions trading scheme.

In the initial phase, Brussels proposes to apply the levy to a very limited number of highly polluting sectors (accounting for 45% of emissions): cement, iron and steel, aluminium, fertilisers and electricity. The new system will be introduced very progressively. During the transition stage (2023-2025), importers, by way of preparation, will be required only to report the _CO2 they emit to manufacture their products. From 2026, they will already have to start paying. In parallel, the free emission permits now enjoyed by these sectors in the EU will be phased out.

“By addressing carbon leakage in this way, companies elsewhere will have incentives to make their production processes greener. The CBAM will also encourage foreign governments to introduce greener policies for the industry,” says Gentiloni. Brussels intends to raise with this rate around 10,000 million euros a year, which will be used to repay part of the debt of 750,000 million of the Next Generation fund.

Which third countries will be the big losers of the _CO2 tax at the EU border? According to the analysis carried out by Brussels, the main victim would be Russia, followed by Turkey, China, the United Kingdom, Ukraine and South Korea, while the impact on the United States would be much smaller. But things may change as this tax expands to other products.

So far, both the Joe Biden White House and China and Russia have protested against the CBAM, a measure they consider to be protectionist on the part of the EU and could violate the rules of international trade. For the US ‘climate czar’, John Kerry, the Brussels initiative poses “risks”.

“Tackling climate change should not become an excuse for geopolitics, for attacking other countries or for trade barriers,” Chinese President Xi Jinping said in his penultimate meeting with Angela Merkel and Emmanuel Macron. “Many experts believe that the introduction (of the carbon tax at the border) may violate several principles of the World Trade Organization (WTO),” says Russian Deputy Prime Minister Alexander Novak.

“The CBAM is an instrument of environmental policy, not a tariff tool. It is online and complies with international trade standards. It will apply to products, not countries, based on their actual _CO2 content, regardless of their country of origin,” said the Commissioner for Economic Affairs.

The Community Executive also argues that it is not alone. Border _CO2 adjustment mechanisms already exist in some regions of the world, such as California, where this type of tax is applied to some electricity imports. Some countries such as Canada and Japan are preparing similar initiatives. In the US, the Democrats have just proposed a similar, albeit less detailed, measure. Even China has just launched its own emissions trading scheme, although _CO2 prices there are much lower than in Europe.

Another of the recurrent criticisms of the Brussels initiative, not only from rival powers but from trade experts, is its extreme complexity, which will make it very difficult to put it into practice. For the time being, the Commission’s proposal has to be approved by both the governments of the Twenty-Seven and the European Parliament. Internal debates in the EU are also expected to be very difficult, although since it is not strictly a tax, unanimity will not be required but only a qualified majority.

Source: The Spanish