EU becomes first leading economy to legislate for ‘green tariff’ on imports

Countries that fail to decarbonise industries such as iron and steel face an effective carbon tax

In the early hours of Tuesday morning the EU became the first big economy to legislate for a “green tariff” on imports, to be levied on goods that are produced with high carbon dioxide emissions.

The carbon border adjustment mechanism (CBAM) means that countries which fail to green their industries will soon face a new threat: an effective carbon tax that will penalise those hoping to profit from high-carbon activities, and force them to clean up.

The system will be applied at first to iron and steel, cement, fertilisers, aluminium, electricity, hydrogen and some chemicals.

Jozef Síkela, minister of industry and trade of the Czech Republic, who led the negotiations in the EU parliament, said: “The carbon border adjustment mechanism is a key part of our climate action. This mechanism promotes the import of goods by non-EU businesses into the EU which fulfil the high climate standards applicable in the 27 EU member states. This will ensure a balanced treatment of such imports and is designed to encourage our partners in the world to join the EU’s climate efforts.”

The agreement is still provisional, and details remain to be ironed out by member states and other institutions. But if all goes according to plan, CBAMs will come into force on a trial basis from next October.

However, at first, there will be no financial or other penalties attached to the EU’s CBAM – companies will only be required to report on the emissions associated with the production of the goods they wish to sell.

Frans Timmermans, vice-president of the European Commission, told the Guardian: “We’re going to ask a tremendous transformation from many parts of our industry. If other [countries] don’t do that – if they don’t comply with what they engaged to do under the Paris agreement – the risk of carbon leakage is huge. You will see European industry move elsewhere, to places where they don’t have to comply with strict norms, to emit CO₂ there. That would render our climate action useless.”

Pascal Canfin, chair of the EU parliament’s environment committee, hailed the move: “The agreement is a world first. For the first time, we are going to ensure fair treatment between our companies, which pay a carbon price in Europe, and their foreign competitors, which do not. This is a major step that will allow us to do more for the climate while protecting our companies and our jobs.”

The move, announced as part of the EU green deal, a big push to meet the EU’s stringent climate targets, could be the first salvo in a global carbon trade war – or the first step towards an equitable global effort to cut greenhouse gas emissions in line with urgent scientific advice. The US and the UK are considering how to respond, but the countries most affected by Europe’s moves are likely to be those with high-carbon export industries such as China, Turkey, India and potentially Australia.

Russia faces its own sanctions and penalties based on its aggression in Ukraine, but could also be targeted by CBAMs.

The move must also be seen in the context of the row between the EU and the US over the Inflation Reduction Act. President Joe Biden’s climate legislation contains hundreds of billions of dollars in incentives to green industries, which has been seen by some EU member states as an aggressive act that could undermine the attractiveness of the EU for green investment.

The US has said the EU should develop its own incentives. Canfin, without naming the US, made it clear that the CBAM was also part of the EU response, saying the aim was to make Europe “a sovereign green power”.

While the initial CBAM requirements will apply to only a few sectors, Canfin made it clear the EU parliament had many more in its sights. “We have also provided for the future integration of processed products, such as cars,” he said. “The message to our industries is clear: there is no need to relocate because we have taken the necessary measures to avoid unfair competition and carbon leakage.”

Camille Maury, a senior policy officer for the decarbonisation of industry at the conservation group WWF, said the agreement was “half-baked”, however, and should be expanded to address the free permits to produce carbon dioxide that some companies are allocated under the EU’s existing carbon trading scheme.

“The provisional agreement on CBAM includes some good elements on the scope and the emissions covered. Now talks will intensify on the overlap with the free permits to pollute allocated to industry under the EU ETS [emissions trading system],” she said. “To act as a real alternative to carbon leakage protection measures, and push EU industry to decarbonise, co-legislators will have to agree on finally upholding the ‘polluter pays’ principle by phasing out half of free permits to pollute for CBAM sectors by 2030, and totally by 2032. They shouldn’t budge for industry lobbying while we are in a climate emergency.”

Lord Stern, the climate and development economist, believes the tariffs should be narrowly applied to particular high-carbon industries, such as steel. Steel-making traditionally involves high fossil fuel use, but some companies have been switching to “green steel”, using electric arc furnaces and in some cases hydrogen as fuel. Carbon border taxes on steel could spur the investment required for more to follow suit.

“CBAMs have to be intelligent,” said Stern. “They have to be simple in definition and in operation and focused on a narrow group of relevant industries such as steel and cement. If you explain to other countries what you have in mind, and that they will not be affected if they have the right policies, then you can have a constructive dialogue. But if you use them as blanket protectionism, that would be divisive. And it is important to recognise that other countries may pursue sustainable growth and emissions reductions in different ways, and you should not insist that every country uses a carbon price, notwithstanding the great value of that policy tool.”

A government spokesperson said: “Domestically, as we transition to net zero, the UK recognises the importance of addressing the risk of carbon leakage to ensure that our ambitious policy of decarbonisation is not undermined. The government is exploring a range of policies that could potentially mitigate future risk of carbon leakage. The government committed to consult on this, including on whether measures such as product standards and a carbon border adjustment mechanism could be appropriate tools in the UK’s policy mix, and will do so in the spring.”

cover photo: The Hybrit facility in Luleå, Sweden, which uses hydrogen rather than fossil fuels to produce steel. Photograph: Jonathan Nackstrand/AFP/Getty Images