Carbon border tax: EU levy justifiably penalises carbon-intense imports

The EU’s recently-agreed carbon border adjustment mechanism is that rare innovation, a levy that levels the playing field and has a lot more going for it too.

It is easy to see why CBAM, as it is catchily known, is so attractive for Europe. The continent’s companies pay a high price for CO₂ they emit above key thresholds — some €85 per ton. That encourages them to adopt clean technologies. But it also adds to the cost of goods produced in Europe, layering around 20 per cent on each ton of domestically-produced steel, for instance.

The CBAM is designed to tax imports of steel and other carbon-intensive products, mirroring European production costs. That should stop “carbon leakage”, where output moves elsewhere and employment in Europe takes a hit.

The duty is not expected to apply to countries which have their own Europe-aligned carbon tax. That makes the CBAM a useful tool to prod recalcitrant trading partners into adopting their own CO₂ pricing system. That is a big positive.

Europe accounts for less than 10 per cent of CO₂ emissions. There is a limit to the impact it can have by decarbonising its own companies. The CBAM takes the world one step closer to a global carbon price, a vital anchor to turning emissions from an externality into a producer cost.

There will be losers from CBAM. These will be countries which export a lot of carbon-intensive goods to Europe, and whose companies will lose current advantages. Ukraine, Turkey, Egypt and Mozambique risk paying between $1-5bn a year, according to a study by Boston University.

Concerns that CBAM might increase inequality are well-founded. Developed countries should shoulder a greater share of the decarbonisation burden. But, rather than unilaterally hobbling European companies, a better solution would be to redistribute resources some other way.

The hairiest question is how CBAM will apply to the US. It does not have a carbon tax, but it does have policies designed to cut CO₂. With the cost actually borne by its companies uncertain, purists would argue that the US should be caught in CBAM’s net. In the real world of superpower dominance, the problem is likely to be fudged.

The Lex team is interested in hearing more from readers. Please tell us what you think of the EU’s carbon border adjustment in the comments section below.

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