The EU’s Green Deal lays out the steps to help the bloc achieve net-zero emissions by 2050 and is one of the most ambitious government plans ever put forward to tackle climate change. One of its policies is the carbon border adjustment mechanism. Just what is this and how can it be used to tackle climate change? We take a closer look.

To begin with, goods produced in the EU will be more expensive than those that aren’t subject to emissions-reducing regulations, which will make local businesses less competitive against global businesses. However, to keep companies from leaving the bloc, EU policymakers are figuring out how to penalise imports of carbon-intensive goods.

The idea was first given in July 2019, and is today called a carbon border adjustment mechanism, from its former carbon border tax name. The World Trade Organization doesn’t like protectionism, so this mechanism could spare countries that already put a price on carbon emissions. According to the World Bank, only a fifth of global emissions are subject to carbon pricing. 

How Will it Work?

According to Bloomberg, the carbon border adjustment mechanism will likely function similarly to the EU Emissions Trading System, the world’s biggest carbon market. In such a system, importers of emissions-intensive goods pay a charge linked to what they would’ve had to pay if they’d been covered by Europe’s carbon-reduction laws in the first place. The price of carbon in the programme is at 43.44 Euros, the highest point it’s ever been. 

Challenges

There are challenges that Europe needs to address to implement the mechanism, ranging from political issues to technical factors such as how to determine the amount of carbon embedded in a product and how to credit countries outside the bloc. The commission plans to unveil draft regulations in June, but the mechanism will have to be approved by the European Parliament and by member states, a process which could take as long as two years. This means that the mechanism realistically won’t take effect until 2023. 

One of the biggest sticking points of the mechanism is whether the free carbon allowances currently given to businesses seen as most likely to leave the EU will continue. However, keeping these allowances would make the mechanism incompatible with World Trade Organization rules. 

Further, the mechanism could cause diplomatic unease in countries from Ukraine to China to India. This cannot happen, because the planned levy will be proposed just five months before a vital climate summit, where relationship-building will be key to ensuring that major emitters improve on their climate commitments. 

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What Industries Will it Include?

It will be limited to a few sectors, with power, cement, steel, aluminium, and fertilisers the likeliest candidates, mostly involving Russia, Ukraine, Turkey and China. It will be designed to enable a gradual extension into other industries over the coming years. 

How Much Money Will the Mechanism Bring in for the EU?

The commission estimates that the mechanism could raise anything from USD$6billion to $16billion per year. However, this will depend on which industries are included in the scheme. Commission officials, in a policy brief in December, said, “Any revenues should rather be channelled towards developing countries for climate purposes, or towards helping global industry decarbonise.”

However, the mechanism has faced charges of being unfair, with emerging economies like South Africa, India, Brazil and China calling the policy “discriminatory.” In a joint statement, the four countries “expressed grave concern regarding the proposal for introducing trade barriers such as unilateral carbon border adjustment”. They described the proposal as “discriminatory and against the principles of equity and [common but differentiated responsibilities and respective capabilities]”

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