EU carbon tax raises hackles near and far

The European Union's ambitious carbon border tax scheme introduced recently has raised serious concerns from its trade partners and industries.

On July 14 the European Commission announced plans for a Carbon Border Adjustment Mechanism, or CBAM, which will take effect in 2026, first targeting the iron, steel, cement, aluminum, fertilizer and electricity industries.

The European Commissioner for Economy Paolo Gentiloni said the mechanism was being introduced "to address the risk of carbon leakage, which can undermine our efforts when production is moved elsewhere to avoid EU carbon pricing".

Liu Youbin, a spokesman for China's Ministry of Ecology and Environment, told a news conference last Monday that the CBAM is essentially a unilateral measure to extend the climate change issue to the trade sector.

"It not only violates World Trade Organization principles but also undermines the world's multilateral free trade system, mutual trust in the international community and prospects for world economic growth."

Liu stressed that the EU move runs counter to the principle of common but differentiated responsibilities in the United Nations Framework Convention on Climate Change and the 2015 Paris Climate Agreement.

An official of India's environment ministry, quoted by The Times of India last week, voiced similar concerns.

"India has always held a view that any such unilateral carbon border adjustment will be discriminatory and against the principles of equity and (common but differentiated responsibilities and respective capabilities)," the official said.

Such a trade barrier will not help to bridge the trust deficit between developed and developing countries before COP26, he said, referring to the UN climate conference to be held in Glasgow, Scotland, in November.

In April Brazil, South Africa, India and China, in a climate group known as BASIC, issued a joint statement calling the CBAM discriminatory.

US government officials have also expressed their reservations despite a push by some Democratic lawmakers for a similar scheme.

Jonathan Pershing, a member of the US climate envoy's team, said that implementing a border levy to price carbon-intensive imports and protect European industries will be "extremely complicated".

US Treasury Secretary Janet Yellen said that while carbon pricing can be an effective tool, it should also be recognized that some countries may use other means to curb emissions.

The US does not have a carbon pricing scheme at the federal level.

Russian Deputy Prime Minister Alexander Novak said in June that the CBAM "may clash with global trade rules and threaten the safety of energy supplies".

Hosuk Lee-Makiyama, an economist in Brussels who is director of the European Centre for International Political Economy, said the CBAM assumes that every country must introduce a carbon price that is identical to that of the EU. But there are many legitimate reasons why carbon prices may be lower in another country, in the same way that land prices, wages or interest rates differ.

"The CBAM contradicts the idea that the fastest path toward a carbon-free society for each country might be different than the one that the Europeans have chosen for themselves," he said.

Hege Fjellheim, director of carbon research at Refinitiv, a provider of financial markets data, said that while the rationale for the CBAM is to create the right conditions for European industries to innovate, thrive and be green in a carbon-constrained world, it is also a clear "nudge" to other big emitters to improve their behavior to avoid a carbon cost on their exports to Europe.

The gradual phaseout of free allocation of carbon allowances over 10 years in the European Commission proposal shows that it has chosen a cautious approach on the contentious issue of the CBAM, she said.

"This aims probably both to ensure backing from European industry and policymakers and avoid stirring up international partners."

DIHK, the Association of German Chambers of Industry and Commerce, and VDMA, the German Engineering Federation, said that distortions in trade flows would negatively affect the competitiveness of companies that process products subject to the CBAM.