The EU’s carbon border tax hits roadblocks

The European Commission's Fit-for-55 emission plan, with its extended emission trading scheme and the new carbon border tax, will be fighting an uphill battle. The carbon border tax scheme — the first of its kind in the world — could become Europe's opening bid to get moving internationally beyond mere discussions. If there is an international agreement in the end, it would have served a purpose. If not, it may only end up creating new battle lines between trading partners. There may be broad consensus on the goal of reducing carbon emissions, but questions remain: who is to shoulder the bill?

The carbon border adjustment mechanism, CBAM, is expected to be levied on imports of iron and steel, cement, aluminium, fertilisers and electricity. The scheme is meant to start in 2026, with a dry run from 2023 onwards. The Commission says the system will be WTO-compatible and fair, requiring importers to buy emissions certificates at the same price as domestic producers. But resistance is already building up at home and abroad.

Due to its complexity, the Commission starts with only a few imports that represent about 5 per cent of EU goods imports. Those exporters would need to provide extensive data on their direct carbon emissions and those of their energy sources from 2023, and then convince the European Commission the data is reliable.

This comes at a cost. Europe's carbon-intensive industries fear a technocratic monster. Trading partners such as China and Russia have already raised their objections, while the US pointed out that there are other ways to reduce emissions.

What 'fair' means is also complex. The WTO grants preferential treatment to developing countries. Even if there is a WTO-compatible system that provides extra allowances for emerging countries, there will be administrative costs that increase prices. And what about those where trading schemes are operational, but not to the same standards as the EU? Or those countries that are curbing emissions with different means? The next test is to see what the WTO says. It will be an opening bid. Let's see how far it gets.