European Union governments have reached an agreement on the world’s first major carbon border tax as part of an overhaul of the bloc’s flagship carbon market, which aims to make its economy carbon neutral by 2050.
EU ministers finalized the details of the Carbon Border Adjustment Mechanism early Sunday, after reaching a tentative agreement earlier in the week.
The groundbreaking measure adds a pollution price to certain imports into the European Union. Carbon-intensive industries within the bloc must meet strict emissions standards, and the tax aims to ensure these companies are not undermined by competitors in countries with weaker rules.
The measure will initially apply to iron and steel, cement, aluminium, fertilisers, power generation and hydrogen before being extended to other goods.
It also discourages EU companies from shifting production to more tolerant countries, in what EU lawmakers call “carbon leakage”.
Under the new mechanism, companies will have to buy allowances to cover emissions generated by the production of goods imported into the European Union, based on calculations linked to the EU’s carbon price.
Mohammad Chahim, a Dutch socialist politician who led the negotiations on the law for the European Parliament, said in a statement that the measure will be a “crucial pillar” of Europe’s climate policy.
“It’s one of the few mechanisms we have to encourage our trading partners to decarbonize their manufacturing industries,” he added.
However, the plan has met opposition from countries like the United States and South Africa, concerned about the impact carbon border taxes could have on their manufacturers.
“There are many concerns on our part about how this will affect us and our trade relationship,” US Trade Representative Katherine Tai said at a conference in Washington last week, according to the Financial Times.
The European Union and the United States have already fallen out over President Joe Biden’s $370 billion climate plan under the Inflation Reduction Act, which EU officials say will hurt European companies based in the US sell market.
In a nod to the challenge of anti-inflation law, the latest EU deal provides more money for the development of clean energy technologies in Europe.
The EU’s carbon measure could lead to “rapid deindustrialisation” of African countries exporting to the European Union, warned Faten Aggad, a senior adviser on climate diplomacy at the African Climate Foundation.
Another risk is that clean energy capacity in poorer countries is simply shifted to the production of export goods, while local consumption-oriented industries rely on dirty fuels. Aggad said on Twitter. She added that carbon emissions certification in producer countries remains a “challenge”.
The carbon border tax is part of a broader deal agreed on Sunday that will reform the EU carbon market to cut its emissions by 62% by 2030 compared to 2005 levels.
The EU carbon market, known as the Emissions Trading Scheme (ETS), already caps greenhouse gas emissions from more than 11,000 energy and manufacturing facilities, as well as all internal EU flights, covering some 500 airlines.
Businesses receive or buy carbon credits, or “allowances,” which can then be traded. The ETS, which was extended to shipping on Sunday, is key to the European Union’s bid to become the world’s first carbon-neutral continent.
As part of the recent reforms, the amount of free emission allowances will be phased out between 2026 and 2034. At the same time, the Carbon Border Adjustment Mechanism will be phased in to protect domestic companies from being undercut by foreign competitors.
After nearly 30 hours of talks, negotiators also agreed to introduce a new carbon market for heating and transport fuels from 2027, with an option to postpone this by a year if energy prices remain at current high levels.
“This agreement will make a huge contribution to tackling climate change at low cost,” said Peter Liese, the European Parliament’s chief negotiator, in a statement. The deal will “give European industry a clear signal that investing in green technologies pays off,” added Liese.
The European Parliament and European Council must formally approve the agreement before it enters into force in 2026.