Is the carbon border tax coming?

"We will not accept that environmentally substandard goods unfairly compete with European products, while at the same time damaging the planet," declared the President of the European Council Charles Michel in a speech at the Brussels Economic Forum on 8 September 2020, thereby already summarising the basic idea of the carbon border tax quite well.

Goods produced outside the European Union do not have to comply with the strict European environmental standards. This causes the risk of a so-called "carbon leakage". This term refers to the relocation of production facilities to countries outside the European Union with less stringent emission reduction targets. There is also a risk that EU products will be replaced by imported more carbon-intensive products, as these are cheaper to produce and can therefore be offered at lower cost. The European Union wishes to prevent these effects.

The carbon border adjustment mechanism is intended to address precisely this point. The aim is for the price of imported goods to reflect the carbon footprint of the product. Thus, there is ultimately also a price on carbon dioxide emissions that are generated outside the European Union but originate from the production of goods that are sold on the European market. The planned carbon border tax thus pursues two objectives at the same time: on the one hand, the tax is intended to serve climate protection, but on the other hand it also aims to protect trade.

The actual design of the carbon border adjustment mechanism is still under discussion. Four different options are currently discussed.

1.         Carbon border tax

One option is to levy a tax at the EU border on imports of products produced in sectors with an increased risk of carbon leakage. This could be a border tax or a duty on certain carbon-intensive products.

2.         Extension of the EU Emissions Trading System

Another option would be to extend the EU ETS to imports. This solution requires the purchase of emission allowances under the EU Emissions Trading System by foreign manufacturers or importers.

3.         Emission allowances outside the European Emissions Trading System

In addition, an obligation to purchase allowances from a specific import pool outside the EU ETS, which would reflect the ETS price, could also be introduced.

4.         Carbon tax at consumer level

Finally, the option of imposing a carbon tax (e.g. excise tax or some form of value added tax) at consumer level on certain products manufactured in sectors subject to the risk of carbon leakage is discussed. Under this option, the tax would apply to EU production and imports.

The European Commission has launched public consultation on the carbon border adjustment mechanism. All interested parties are invited to share their views on the planned carbon border tax and express their support for one of the options presented until 28 October 2020.

The questionnaire is available on the Commission's website. The public consultation is explicitly targeting all stakeholders, namely national and sub-national administrations in the EU and in the rest of the world, businesses, trade associations, non-governmental organisations, citizens, workers associations and trade unions, consultancies, think tanks, research and academic institutions.

In the second quarter of 2021, the Commission intends to present a draft directive on the carbon border tax on the basis of the responses received in the course of the consultation procedure.

Dr Gernot-Rüdiger Engel: "The carbon border adjustment mechanism will come - but in what form is still completely open. Companies affected should take the opportunity to participate in the consultation process and to present their views to the Commission."