European Union Agrees to Impose World’s First Carbon Tariff on Imports

European Union flags are seen outside the European Commission headquarters in Brussels, on Nov. 14, 2018. Francois Lenoir/Reuters

The European Union (EU) struck a political deal on Tuesday morning that seeks to impose tariffs on carbon dioxide emissions made by manufacturers of imported goods that are deemed to be polluting, a first of its kind carbon tariff.

The members of the European Parliament arrived at an agreement with the European Council on the EU Carbon Border Adjustment Mechanism (CBAM) aimed at supporting European industries as the region pushes forward with its decarbonization plans. The deal seeks to equalize the price of carbon paid for EU products operating under the EU Emissions Trading Scheme (ETS) and imported goods.

“This will be achieved by obliging companies that import into the EU to purchase so-called CBAM certificates to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS,” according to a news release on Dec. 13.

Under the deal, only nations with the “same climate ambition” as the EU will be in a position to export to the region without having to buy CBAM certificates.

The CBAM initially will cover industries such as fertilizers, cement, electricity, aluminum, steel, and iron. Later on it will be expanded to include hydrogen, certain indirect emissions, and downstream products like bolts and screws.

“It is one of the only mechanisms we have to incentivize our trading partners to decarbonize their manufacturing industry,” said rapporteur Mohammed Chahim, vice chair of the Group of the Progressive Alliance of Socialists and Democrats in the European Parliament.

“On top of this, it is an alternative to our current carbon leakage measures, which will allow us to apply the ‘polluter pays’ principle to our own industry. A win-win situation.”

The bill, which will be the “first of its kind” and is designed to be compliant with the rules set by the World Trade Organization (WTO), will apply starting Oct. 1, 2023. However, there will be a transition period whereby importers’ obligations shall be limited to reporting. The transition period is still up for negotiations.

Deal Approval

The deal needs to get formal approval from the European Parliament and the European Council before it comes into effect. CBAM is part of the “Fit for 55 in 2030” package that aims to cut down greenhouse gas emissions in the EU by at least 55 percent of 1990 levels by 2030.

Before the transition period ends, the European Commission will check whether other goods need to be brought under the purview of the CBAM. By 2030, the EU plans on including all goods covered by the ETS into this scheme.

At present, the EU grants free CO2 permits for domestic industry to protect them from competition from foreign firms. These free permits are expected to be phased out once the CBAM system kicks in.

Countries like China have criticized the EU plan. The CBAM comes as Europe is at loggerheads with the United States over certain green tech subsidies. Brussels had earlier said that certain countries, including the United States, could dodge the CBAM levies.

Last week, the EU agreed on a proposal to increase the price that airlines will have to pay for CO2 emissions. Airlines will soon have to pay for CO2 permits, which have mostly been free till now.

In a statement, the industry group “Airlines for Europe” said that it was “extremely disappointed” with the EU plan to end free permits by 2026.

“This is well before truly effective decarbonization solutions will be available at the scale needed for them to be effective,” it said.