The EU Must Think Globally on Carbon Import Tax

Frans Timmermans, the European Union’s climate czar, has a difficult balancing act on his hands. He must guarantee that the EU delivers on its international commitment to tackle climate change, while ensuring that new measures avoid hurting European workers in traditional industries, such as steel and ceramics.

One way Timmermans attempts to walk this delicate line is the recently launched Carbon Border Adjustment Mechanism. The mechanism will tax the carbon content of goods imported into the EU at its borders, making it more difficult for cheap, high-carbon goods to out-compete cleaner but more expensive domestic goods, from inside the bloc.

This border tax is among a package of proposals unveiled by the EU in its Green Deal—Europe’s main response to the climate crisis. The EU’s Green Deal aims to reduce greenhouse gasses by 55 percent by 2030. To reach this target, new legislation called the “Fit for 55” package was developed to address emissions in everything from buildings to land use and beyond.

While the majority of the proposals look at regulations pertaining to “internal” matters such as energy pricing, industrial emissions, and renewable energy, the Carbon Border Adjustment Mechanism is the only element of the EU’s Green Deal that addresses imports from countries outside the EU. By taxing the carbon content of industrial goods imported into the EU at its borders, the European Commission hopes not only to protect European industry but to simultaneously generate revenue that can support the transition to a low-carbon economy.

In principle, this mechanism makes sense. However, there is a danger that this initiative penalizes developing countries by placing heavy import duties on their goods, making their production less competitive. It is the EU’s responsibility to curtail the world’s biggest polluters, but this tax must not discriminate against the developing world.

There are also questions about whether the prospective gains justify the costs to developing countries, whose trade with the EU represents only a small percentage of global emissions. India, for example, has the highest rate of CO2 importation into the EU of all the low- and middle-income countries, but its goods account for only just over one percent of total EU imports. The impact of the tariffs on Indian companies and workers would be considerable; the net reduction in global carbon much less so.

As proposed, up to $16 billion of developing country industrial exports to the EU could face an additional charge on products such as iron and steel, cement, fertilizer, aluminum and electricity generation. But stunting imports from developing countries deprives them of revenue that could be used for modernization of their high-carbon industries. For a country like India, this means prolonging the lifetime of polluting factories and production methods and slowing down the shift to clean and green development.

These effects could be countered if richer nations were making good on promises made via the Paris climate agreement to share scientific and technological research with poorer countries through tech transfer, and to step up their climate finance commitments, but so far neither have materialized.

The Carbon Border Adjustment Mechanism could still be made to work for developing countries. A transition phase, where tariffs won’t have to be paid, has been built into the Commission’s draft; but the EU must provide resources for developing countries to assist this transition. In addition, the EU can exempt the least developed countries that already benefit from preferential trading terms from this new mechanism, at least to begin with.

Then, as the economies of these countries grow, they will become subject to the carbon import tariffs tax.

The EU can also ensure that it is meeting its commitments for tech transfer and climate finance. So far, the world’s richest countries have consistently missed the targets for $100 billion a year in climate finance, a figure which will drastically help countries not only modernize industry but tackle adaptation and mitigation. Tech transfer is equally important. We cannot expect developing countries to decarbonize without access to the research and technology to allow them to do so.

Exempting developing countries’ exports from the Carbon Border Adjustment Mechanism would not materially undermine the EU’s carbon reduction efforts but will avoid negative effects for developing nations. Ultimately, decarbonization must be a global effort, and the transition to low-carbon societies must be fair. Otherwise we risk alienating those who we need to bring along with us on the journey.