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Explainer: What is the Europe Carbon Border Tax?

by Deena Robinson Europe Feb 17th 20223 mins
Explainer: What is the Europe Carbon Border Tax?

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 Europe Union carbon border tax, or 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 European Union (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 of a Europe carbon border tax was first given in July 2019, and is today called a carbon border adjustment mechanism. 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 27 countries have implemented some form of carbon tax, and 13% of global emissions are subject to carbon pricing. 

How Will it Work?

According to Bloomberg, the carbon border adjustment mechanism will function similarly to the EU Emissions Trading System, one of the world’s biggest carbon market – China currently claims the title. 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. This is all to prevent and reduce the risk of ‘carbon leakage’. The price of carbon in the programme is at about 90 Euros per tonne, the highest point it’s ever been and markedly so following the recent UN climate summit where nearly 200 nations agreed to reduce the use of fossil fuels and to “phase down” coal. 


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. What’s more, a penalty system has yet to be determined. 

In July 2021, the European Commission, EU’s executive branch, announced a raft of new policies to meet the ambitious targets set out in the EU Green Deal, and confirmed that the carbon border tax will not be fully implemented until January 2026. This means that significant carbon emissions continue to be unregulated and released into the atmosphere during trading and transportation in the next few years.

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 and potential international trading tensions with countries Russia, China and even the US. Many EU trading partners including Russia criticised the proposal, have claimed that they could potentially lose up to USD$7.6 billion from the carbon border tax.

You might also like: Carbon Tax Pros and Cons: Is Carbon Pricing the Right Policy to Implement?

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 2020, 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].”

Featured image by: Max Pixel

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