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EC seeks views on sectors to protect with EU carbon border tax

Highlights

Wants to avoid carbon leakage as EU tightens CO2 goals

EU leaders want carbon border policy applied by 2023

Could raise up to Eur14 billion/year for EU budget

The European Commission is seeking views on how to set up an EU carbon border adjustment mechanism and which sectors should benefit from it, as part of efforts to prevent carbon leakage and raise money for the EU budget.

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The aim of the mechanism is to ensure that the EU's energy-intensive industrial sectors, including power generation, steel, oil refining and heavy manufacturing, do not shift their production to regions with less stringent carbon constraints, such as China and the US.

Any carbon border adjustment mechanism would have to comply with World Trade Organization rules and "other international obligations," the EC said in a consultation document published July 23.

It seems likely, however, that any EU attempt to apply a carbon price to selected imports from selected countries would lead to tense trade and climate talks with those countries.

France first floated the idea of a carbon border tax to protect EU industry back in 2009, but quickly dropped it after the rest of the EU failed to back it.

The EU's increased climate ambition -- it wants to be the world's first climate-neutral region by 2050 -- and the need to raise money to support recovery after the pandemic lockdowns have now revived interest.

EU leaders on July 21 invited the EC to propose such a mechanism next year, with a view to introducing it at the latest by January 1, 2023.

The EC has estimated such a mechanism could raise between Eur5 billion and Eur14 billion per year, helping to finance the EU's planned Eur750 billion recovery fund to help the kick-start the economy.

Replacing free allowances

The mechanism would be an alternative to the current free allocation of EU Emissions Trading System allowances or compensation for higher electricity costs that sectors at risk of carbon leakage receive, the EC said in its consultation document.

It plans to consider various approaches, all with a strong link to EU carbon prices.

These include a border tax or customs duty on selected carbon-intensive imported products, or a carbon tax, such as excise duty or VAT, on EU and non-EU selected products from carbon leakage-risk sectors.

Another option would be to require importers or foreign producers to buy EU carbon allowances. This could be done by extending the EU ETS to imports or by having a specific pool of allowances for imports outside the ETS, but mirroring ETS prices.

The EC also wants input on how to discover and verify the carbon content of imported products.

It will also explore whether EU exporters should receive a rebate on their carbon costs, which would enable lower export prices.

The public consultation is open until October 28.

Power imports covered

Electricity imports to the EU should be subject to any such mechanism, EU economy commissioner Paolo Gentiloni said in March.

The EU currently imports electricity from non-EU countries such as Ukraine, Russia and Serbia, and now also the UK as a newly non-EU country.

"We will put a carbon price on imports to deter polluting processes from shifting elsewhere, and to prevent polluting products from flooding the market," Gentiloni told a tax event in Brussels hosted by the EPC thinktank.

"Obviously one sector is electricity and this is for sure [to be included]," he said.