Europe Reaches Deal on Landmark Carbon Import Tax

The European Union reached an agreement to impose a tax on imports based on the greenhouse gases emitted to make them, inserting climate change regulation for the first time into the rules of global trade.

The agreement on Tuesday morning (12/13) between European national governments and the European Parliament ends more than a year of negotiations on the details of the plan. It is expected to be adopted formally by the EU in the coming weeks as part of a sweeping package of legislation that would step up the bloc’s efforts to limit global warming.

The plan aims to protect European manufacturers from competitors in countries that haven’t regulated carbon dioxide emissions. It would also use the bloc’s economic heft to push countries to set a price on carbon, either through a tax or other means such as a cap-and-trade system; manufacturers from those countries would benefit from a deduction of that cost from the tax when their goods arrive at Europe’s borders.

The plan, known as the carbon border adjustment mechanism (CBAM), has angered the EU’s trading partners, particularly in the developing world, where manufacturers tend to emit relatively large amounts of carbon dioxide emissions. It also has unsettled manufacturers in the U.S., who are concerned the measure would create a new web of red tape to export to Europe.

The tax will first target the highest polluting products:  iron, steel, cement, fertilizers, aluminum, and electricity. The test period for the agreement will begin in October 2023, during which importing companies will have to report their carbon emission obligations.

In subsequent years, importers will be required to pay the tax in accordance with the EU’s goal of phasing out the free emissions allowances the bloc gives its industries under its carbon credit system.

“CBAM will be a crucial pillar of European climate policies. It is one of the only mechanisms we have to incentivize our trading partners to decarbonize their manufacturing industry,” said the European Parliament’s lead negotiator, Mohammed Chahim.

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