The European Council's official website announced on Tuesday that an interim and conditional agreement had been reached between the Council and the European Parliament regarding the European Union's Carbon Border Adjustment Mechanism (CBAM), commonly known as the EU carbon border tax, expected to undergo a trial run starting in October 2023.

Multiple industries affected

The carbon border tax is a core component of the EU's "Fit for 55" emissions reduction plan, aiming to impose taxes on imported goods from countries and regions with relatively lenient carbon emission restrictions.

Last July, the EU released the comprehensive "Fit for 55" package, which includes expanding the EU carbon market, ceasing sales of fossil fuel cars, levying aviation fuel taxes, increasing the share of renewable energy, and implementing a carbon border tax, among 12 new laws. The goal is to reduce carbon emissions by 55% by 2030 compared to 1990 levels.

According to media reports, the carbon border tax agreement resulted from overnight discussions among EU officials and lawmakers, starting on Monday and concluding at 5 a.m. Brussels time on Tuesday morning, finalizing the world's first tariff policy related to carbon reduction. Subsequently, formal approval is still required from the 27 member states and the European Parliament.

As per the agreement, the carbon border adjustment mechanism will cover steel, cement, aluminum, fertilizers, and electricity. Apart from the five products proposed by the EU, the latest agreement also includes hydrogen energy, specific indirect emissions, specific precursors, and certain downstream products such as screws and bolts, similar to steel products.

Preventing domestic company relocation

The EU's introduction of CBAM aims to address the issue of "carbon leakage," essentially preventing EU-based companies from relocating outside the EU to evade strict emission reduction policies.

As the EU moves forward with the carbon border tax, the risk of heightened trade disputes globally increases due to the U.S. "Inflation Reduction Act." The EU, Japan, South Korea, and others argue that the provisions in the "Inflation Reduction Act" regarding subsidies for electric cars are discriminatory and violate World Trade Organization rules.

Despite criticisms that the EU's carbon border tax might easily lead to trade disputes, the EU argues that CBAM, as an environmental measure, complies with international trade rules. Its aim is to prevent European industries from shifting carbon emissions outside the EU.

Imported products related to this policy will require purchasing carbon credits

The current agreement schedules the implementation of the EU carbon border tax to commence a trial run in October 2023, initially applying only to reporting obligations to collect data. Subsequently, this policy will gradually take effect, requiring all companies importing relevant products to purchase carbon credits.

Amid an energy crisis, European carbon credit prices have surged this year, fluctuating around €80 per ton. Leading global steel producer Baosteel mentioned the impact of the EU carbon border tax in its mid-year 2021 Climate Action Report, estimating a tax of €40-80 million annually based on a €80 per ton carbon dioxide taxation.

This week, the EU will also discuss the EU Emissions Trading System to ensure policy consistency for domestic and foreign companies, avoiding violations of World Trade Organization rules. Currently, the EU grants free carbon credits to domestic industries, but as the carbon border tax takes effect, these free credits will gradually be phased out. The EU will further refine the specific processes and progress in negotiations this week.

It's worth noting that the carbon border tax includes exemption mechanisms. Countries in alignment with the EU's emission standards will enjoy tax exemptions. However, Mohammed Chahim, the European Parliament member leading these negotiations, emphasized on Tuesday that countries without exact carbon trading prices cannot benefit from exemptions, meaning even G7 countries, members of the "climate club," won't directly qualify for exemptions.

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