As part of its efforts to combat climate change, the European Union (EU) is considering implementing a carbon border tax. This tax would require importers of steel, fertilizer, and electricity to report the greenhouse gas emissions associated with the manufacture of the imported goods starting as early as October. By 2026, companies deemed to be climate polluters could be required to pay the tax as a way to encourage cleaner production practices and reduce emissions.
In December of the previous year, the EU Parliament, the Council of the EU, and the European Commission reached an agreement on a crucial issues paper outlining a carbon border adjustment mechanism (CBAM). As per the paper, a CO2 tax would be levied on certain imported products entering the EU. The purpose of this tax is to ensure that imported goods are subject to the same CO2 costs as domestic products, in order to prevent the risk of carbon emissions being shifted to other countries.
As per the current plans, the CBAM regulation is set to be enforced on October 1, 2023, with a two-year transition phase. During this transitional period, only goods and intermediate products that are highly CO2-intensive in their production and at risk of relocation will be subject to CBAM. This includes products such as:
- and steel.
Importers during this period will be required to report the greenhouse gas emissions directly associated with the imported products. Starting from 2026, after the transition phase, importers of these goods will be obligated to purchase CBAM certificates for the emissions generated during production.
The phased withdrawal of free CO2 certificates from the market is being planned.
The steel and aluminum industries, known for their high CO2 and energy intensity, currently receive a portion of CO2 certificates for free within the EU. However, the plan is to gradually reduce this allocation to zero by 2034. This means that European aluminum and steel producers will face additional financial burden as they will have to purchase CO2 certificates. To level the playing field, CBAM certificates will also need to be purchased for imported goods, just like European producers have to purchase CO2 certificates.
The EU aims to prevent European companies from being disadvantaged by strict climate protection requirements with the implementation of a border adjustment mechanism. The final version of the CBAM Regulation is currently pending approval by the European Parliament and the Council.