The European Parliament will vote on Wednesday on the introduction of a CO2 import tax on products such as steel, cement and fertilizer. This should prevent polluting producers from outside the European Union from gaining a competitive advantage. How would this tax work?
Since last year, European industry has had to pay a lot for its CO2 emissions. In the course of 2021, the CO2 price skyrocketed: those who want to emit 1 ton of CO2 now pay more than 80 euros for it.
Electricity producers and industrial companies in the EU have been subject to the so-called Emissions Trading System (ETS) since 2005, which obliges them to pay for their emissions. But the CO2 price was very low for a long time, partly because companies received many free CO2 rights.
The number of free allowances is now declining, and the rising CO2 price is a sign that the ETS is starting to do its job: the higher the price companies have to pay for their emissions, the more they are encouraged to reduce them.
Steel and cement now excluded
But European producers of steel, aluminum, cement and fertilizers are still getting all their CO2 rights for free. Brussels fears that their production would ‘flee’ abroad if they were subject to a (high) CO2 price. Outside the EU, companies do not have to pay for their emissions, which would give non-European producers a competitive advantage. This is called ‘carbon leakage’.
To prevent this, last year the European Commission presented the Carbon Border Adjustment Mechanism (CBAM), as part of the large package of climate measures by European Commissioner Frans Timmermans.
Under the CBAM, a levy equal to the CO2 price that applies within Europe must be paid when importing goods such as steel and cement. This will remove the (potential) competitive advantage across European borders and make it possible to phase out free CO2 allowances in sectors where there is still a risk of carbon leakage. Without those free rights, it must also become more attractive for these sectors to go green.
Call for global CO2 price
Brussels also hopes that the CO2 import tax will lead to other countries introducing their own emissions trading or CO2 tax. The import tax will not apply to products for which a CO2 price has already been paid in the country of origin that is at least equal to the European price.
“Europe is committed to introducing some form of CO2 pricing worldwide,” says Rabobank economist Maartje Wijffelaars. “This is a big stick to encourage trading partners to do so.”
That is already bearing fruit, Mohammed Chahim, the PvdA MEP who is primarily responsible for the CBAM file, said during a press meeting last week. In the United States, the border tax was seen last year as “an attack on American trade”, but now, according to Chahim, there are increasingly positive sounds about the tax. “They also recognize that this can create a level playing field for their own producers, compared to other regions of the world.”
Mood can still get exciting
On Wednesday the European Parliament will vote on the CO2 border tax and a corresponding revision of the ETS. Not everything is in pitch yet: during the negotiations on the package, no compromise was reached about the implementation date of the CBAM and the pace at which free CO2 allowances will be phased out.
The European Parliament’s environmental committee wants to introduce the CO2 import tax as early as 2026 and to get rid of all free CO2 rights by 2030. The Christian Democrats still see the carbon tax as an “experiment” and therefore argue for a slower implementation, said German MEP Peter Liese last week. According to him, there are major risks for the industry from a hasty implementation. “We don’t want to decarbonize Europe by deindustrializing.”
According to economist Wijffelaars, it is important that the introduction of the CBAM and the phasing out of free allowances go hand in hand. “If you phase out the free allowances here and you don’t have CBAM, then production will shift, or you’ll start importing more from areas where emissions are much higher. If you phase out those free allowances and don’t replace the CBAM, that gives up. a negative result in the economic field and in the climate field.”
After the vote in the European Parliament, an agreement still has to be reached with the European Commission and the Member States. If the CBAM is indeed set up, it will start with a period of many years in which only information is collected. Then Europe will continue to press for international CO2 pricing and climate cooperation, Wijffelaars thinks. “They will continue to use this to move other countries along.”
Climate Votes in European Parliament
- The European Parliament will vote on Wednesday not only on the CO2 import tax, but also on other parts of a broader climate package:
- A ban on the sale of petrol and diesel cars from 2035.
- Tightening and expansion of the ETS: for the first time, shipping will also be included. There will also be a separate ETS for road transport and heating of buildings.
- Creation of a ‘social climate fund’ to combat energy poverty.
- Statutory setting of new climate targets, which should lead to a 55 percent reduction in CO2 emissions by 2030.