Brussels agrees details of world-first carbon tax

Mechanism to penalise importers for carbon emissions set to trigger criticism from foreign governments

EU member states have reached a deal on the world’s first major carbon border tax, finalising the details early on Sunday in the face of claims from the bloc’s key trading partners that the levy creates protectionist trade barriers.

Environmental regulators and ministers from across the bloc signed off on the introduction the Carbon Border Adjustment Mechanism (CBAM), a tool that will force foreign importers to cover the cost of their carbon emissions, after the deal was provisionally agreed on Tuesday.

The deal, a central part of the EU’s strategy to reduce its carbon emissions to net zero by 2050, is expected to be formally agreed by leaders at the European Council and adopted into EU law by the European Parliament before coming into force in 2026.

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Peter Liese, lead negotiator for the European Parliament, told Reuters on Sunday that the CBAM was “the biggest climate law ever in Europe, and some say in the world”. Liese said a large amount of CO₂ emissions would be cut “at the lowest possible price.”

However, the deal has sparked controversy with the EU’s main trading partners, who say it will expose their industries to unfair competition.

The US and South Africa, in particular, have said the CBAM will unfairly penalise their manufacturers, who may now face a wave of cheap imports from companies that are unwilling to pay the EU charge and instead export their goods elsewhere.

European lawmakers on Sunday risked stoking criticism after they agreed to discuss the need for subsidies to support exporters based in the EU and “if needed” present a proposal for rebates by 2025.

Adina Georgescu, energy and climate director at the metal industry trade body Eurometaux, said policymakers had to “find a solution for keeping our exports competitive”. Georgescu added: “Our companies cannot afford further revenue loss and uncertainty on top of today’s existential energy crisis threat.”

The EU has claimed carbon-related rebates would be compliant with World Trade Organisation regulations. However, several analysts have said such support would contravene the rules, should foreign importers need to purchase certificates from the EU to cover their own carbon emissions at the same time.

Geneviève Pons, director general of the Paris-based think-tank the Jaques Delors Institute, said that offering subsidies of any sort would be one of the “main risks” of CBAM if they were introduced. “This would really not likely be WTO compatible,” she said.

Following roughly 30 hours of talks that dragged into the early hours of Sunday, policymakers also agreed to raise the target for reducing emissions in industries covered by the European Emissions Trading System, the mechanism for carbon pricing, to 62 per cent by 2030.

Negotiators in Brussels also agreed to set up a Social Climate Fund to help vulnerable households, small businesses and transport users cope with the effects of carbon pricing. The fund would come into play between 2026 and 2032 and could offer up to €65bn in aid.

“This [deal] will allow us to meet climate objectives within the main sectors of the economy, while making sure the most vulnerable citizens and microenterprises are effectively supported in the climate transition,” said Marian Jurečka, environment minister for the Czech Republic, which holds the rotating presidency of the EU.

Ministers also agreed to phase out free allowances to cover emissions in energy intensive sectors – including cement, aluminium, iron and steel – by 2034.

Not everyone thought the deal was ambitious enough. “The EU missed a critical chance to significantly ramp up its climate ambition,” said Klaus Röhrig, head of climate at CAN Europe, a coalition of NGOs fighting climate change, arguing that the deal prioritised “polluting industry over the people.”

Copyright The Financial Times Limited 2022