Current Affairs

Future EU Carbon Border Tax: Green Protectionism or Levelling The Playing Field?

13th April 2021

David Gabathuler, Senior Legal Consultant with Brussels-based Kadrant, discusses the implications of the future EU Carbon Border Tax and what role associations have to play in it.

The European Union has been at the forefront of initiatives to tackle climate change and the President of the European Commission, Ursula von der Leyen has put climate policy at the centre of the European Commission’s agenda. She has emphasised that “the old growth-model that is based on fossil-fuels and pollution is out of date, and it is out of touch with our planet.”[i] The European Green Deal, which was presented in December 2019 sets out the European Commission’s new growth strategy and the EU has as promised as part of the Green Deal to reduce greenhouse gas (GHG) emissions by at least 55% compared to 1990 levels by 2030 and to become carbon neutral by 2050. 

Due to the global nature of the problem, the EU needs other countries to take similarly strong action to tackle climate change as the EU represents less than 10% of GHG emissions. Otherwise there is the risk that the EU’s actions on climate change will be undermined by the failure of other countries that emit significant GHGs to introduce their own measures to reduce carbon emissions. The EU also potentially risks losing part of its industrial base if energy intensive domestic industries decide to transfer production to “carbon havens” or European-made products are undercut by foreign imports that do not face the same carbon emissions costs – the risk of so-called “carbon leakage”.

Carbon border adjustment

To address such risks, the European Commission proposed in its Green Deal to introduce a carbon border adjustment mechanism (CBAM) in order to maintain a level playing field. According to recent remarks by Frans Timmermans, Executive Vice president for the EU’s Green Deal, the EU would have no hesitation in using a carbon border tax adjustment to protect its industries if the bloc’s trading partners put companies in the region at a disadvantage over climate targets.[ii]

The EU mechanism is expected to focus initially on a few industrial sectors such as steel, aluminium, cement and fertilisers that involve high energy intensive manufacturing processes and are at risk of carbon leakage. The design of the EU mechanism is not yet known. It could be at tax based on the carbon content of goods that applies to imports from countries that do not have adequate policies to address climate change, or more likely, it could involve importers of products with a high carbon footprint buying carbon allowances (like under the EU’s emission trading system (ETS[iii])). The European Commission is expected to issue a draft proposal before the summer with the possibility of a CBAM being introduced by 2023. 

There is increasing support for the introduction of a carbon border adjustment mechanism within the EU. The European steel sector and its trade association (Eurofer) have always been strong supporters of the EU introducing a CBAM, but a number of other European associations have highlighted that a mechanism may be needed given the high level of investments and the significant costs that energy intensive industries will face to meet the ambitious EU climate change goals. The flat glass sector is not expected to be amongst the initial industries that will form of a part of a pilot project for the CBAM, but the European association (Glass for Europe) has stated that it “recognizes CBAM as a possible route to ensure a level playing field between EU and non-EU based manufacturers”.[iv] European industries, however, emphasise the need for any CBAM to be properly designed and for it to be embedded in a comprehensive EU industrial strategy.

Members of the European Parliament have recently adopted a resolution that underlines that the EU’s increased ambition on climate change must not lead to carbon leakage.[v] They emphasised that the new mechanism should be part of a broader EU industrial strategy and cover all imports of products and commodities covered by the reformed EU ETS. More controversially, the European Parliament’s resolution calls for industries that currently receive free allowances under the EU ETS due to the risk of carbon leakage to continue to receive such free permits even after a CBAM is introduced. This is likely to be seen as double protection for the EU industry and raise concerns as to the mechanisms compatibility with the WTO rules.

Countries whose exporters are likely to be directly impacted by a CBAM may well see the mechanism as “green protectionism” and could challenge the measure before the WTO. They may also impose retaliatory trade measures without waiting for any WTO determination. Any CBAM will, therefore, need to be carefully designed to ensure that its operation does not lead to imported product being “taxed” in excess of domestic products and thus being potentially incompatible with the WTO rules that prohibit discriminatory treatment.

No easy task

This is likely to be no easy task as the European Commission itself noted when discussing in 2010 the possibility of extending the EU’s ETS to third country imports. The European Commission emphasised that “it could be hard to implement a system which sought to define the carbon content of each individual category of goods, but such precision might be required”.[vi] It added that “for each category of goods an average EU carbon content would have to be defined. This could become an administrative burden and require agreement on such an average, likely to be a difficult and protracted process”.[vii] Moreover, the European Commission also highlighted at the time, the difficulty of verifying the performance of individual installations in third countries if there was not a highly sophisticated monitoring and reporting system in place at installation level.

The further challenge for the Commission is that the CBAM is intended to encourage the EU’s trading partners to introduce policies to reduce their own greenhouse gas emissions. This will require the CBAM to discriminate between countries depending on the extent to which they have implemented carbon neutral policies. This again heightens the risk of challenge on WTO grounds. 

The introduction of a CBAM is also likely to become highly politicised. The Trump administration had indicated that they may react with possible punitive trade measures if a CBAM was is in essence protectionist.[viii] The Biden administration has taken a more nuanced approach; its new envoy on climate, John Kerry has stated the EU that a carbon border tax adjustment should be a ‘last resort’” and urged the EU to wait until after the COP26 climate change conference in Glasgow to move forward.[ix]

There is clearly a strong desire in the EU to introduce a CBAM, but its design will be critical, especially if the mechanism is be compatible with the WTO rules. The release of the European Commission’s proposal before the summer should start to provide some answers. 

[i] ‘Press remarks by President von der Leyen on the occasion of the adoption of the European Green Deal Communication’, European Commission, December 11, 2019.

[ii] ‘EU rebuffs US concerns over carbon border tax threat’, FT, March 31, 2021.

[iii] The EU ETS caps the total amount of certain GHG is that can be emitted by installations covered by the system. The cap is reduced over time so total emissions fall. Companies receive or buy emission allowances which they can trade. After each year, companies have to surrender enough allowances to cover their emissions.

[iv] ‘Carbon Border Adjustment Mechanism: Flat glass sector’s considerations on a future European mechanism’, Glass for Europe, October 26, 2020.

[v] ‘MEPs: Put a carbon price on certain EU imports to raise global climate ambition’, European Parliament press release, March 10, 2021.

[vi] ‘Analysis of options to move beyond 20% greenhouse gas emission reductions and assessing the risk of carbon leakage’, European Commission, COM(2010) 265 final, p. 12.

[vii] ibid., p. 12.

[viii] ‘US threatens retaliation against EU over carbon tax’, FT January 26, 2020. 

[ix] ‘John Kerry warns EU against carbon border tax’, FT March 12, 2021.

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