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EU: Carbon tax as one option under carbon border adjustment mechanism

EU is considering the introduction of a carbon border adjustment mechanism no later than 2023

EU is considering a carbon border adjustment mechanism no later than 2023

The EU is considering the introduction of a carbon border adjustment mechanism (CBAM) no later than 2023. The European Commission is expected to present a proposal in the second quarter of 2021.

As noted in a release, the European Parliament in March 2021 passed a resolution to support the introduction of a CBAM to impose a carbon price on imports of certain goods from “less climate-ambitious countries.”

The next step would be for the European Commission (EC) to present a detailed proposal (for consideration in June 2021).

What form might an EU CBAM take? The EU’s consultation paper (released July 2020) considers four options for a CBAM:

  • Option 1: A tariff on imports at the EU border on selected products whose production is in industries that are at risk of carbon leakage
  • Option 2: An extension of the EU Emissions Trading System (EU ETS) to imports, requiring the purchasing of EU ETS emission permits by either foreign producers or importers
  • Option 3: A requirement on exporters to the EU to purchase emission permits from a pool separate from the EU ETS, at a price that would mirror the ETS price
  • Option 4: A carbon tax on the consumption of selected products whose production is in sectors that are at risk of carbon leakage, which would also apply to EU production

The resolution passed by the European Parliament’s Committee on Environment, Public Health and Food Safety specifically links the CBAM to the EU ETS. Such an approach would rule out a carbon tariff (Option 1) and a carbon consumption tax (Option 4)—leaving Options 2 and 3.

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