On April 18, the European Parliament approved a comprehensive reform, approving agreements with member states on several key legislative acts for "Fit-for-55" （“Fit-for-55” refers to the EU's goal of reducing net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels）by the end of 2022, including the reform of the carbon emissions trading system and the carbon border adjustment mechanism. (i.e. carbon tariffs)
EU Carbon Market Reform
The European Parliament voted to approve an overhaul of the European Union's carbon market (EU-ETS), which is expected to raise the cost of emissions in Europe and reduce CO2 emissions more quickly in the coming years.
emissions from energy-intensive industries such as steel, paper or oil must be reduced by 62 percent from 2005 levels.
The reform will cut the supply of carbon permits on the market faster than planned, phasing out free permits for industries by 2034 and gradually including shipping in the carbon market starting in 2024.
The Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism (CBAM, or carbon tariff), which will come into effect in 2026, will be phased in over the period 2026 to 2034.It will initially cover imports of steel, aluminum, cement, fertilizer, electricity and hydrogen.
Starting this October, companies will have to start reporting emissions from their imports, including indirect emissions from power plants that supply electricity to overseas plants.
Meanwhile, the European Union is phasing out free allowances offered to European manufacturers under the emissions trading system. The legislation passed Tuesday also approves a timetable for the complete phase-out of free allowances from 2026 to 2034.
During this period, importers will only have to pay for the portion of emissions that European manufacturers do not receive for free. This initiative is designed to treat domestic and overseas manufacturers equally, which is a key reason why Europe says its border tax does not violate World Trade Organization (WTO) rules restricting discrimination against foreign companies.
The price per metric ton of imported CO2 emissions will be the same as the EU ETS, which covers power plants and manufacturers in most industries. Currently, the price of EU carbon allowances is about 90 euros per metric ton, which has risen significantly since the EU proposed to tighten climate regulations in 2021.
The regulation requires importers to obtain authorization from European governments and to be listed in the EU central registry.
That means companies are faced with the complex task of determining how much greenhouse gas is emitted in the production of imported goods.
Significant impact of the Carbon Border Adjustment Mechanism (CBAM)
The regulation will have a significant impact on international trade, especially for countries that do not have a price on carbon emissions.
According to analysts, although the EU regulation is called the Carbon Border Adjustment Mechanism (CBAM), which avoids using the term "tariff," it is essentially a tariff in disguise.
The tax has raised concerns in the U.S., where companies fear the program will add an additional layer of red tape for companies seeking to export products to Europe.
At the same time, the carbon border tax has drawn criticism from some developing countries, where producers tend to emit more carbon dioxide than their European counterparts and rely more heavily on coal power.
Noah Kaufman, an economist at Columbia University's Center for Global Energy Policy, said the carbon border adjustment mechanism is essentially a tariff that would initially apply to energy-intensive products such as: steel, cement, aluminum and fertilizers. Europe already has a carbon pricing system in place to deal with emissions associated with manufacturing products, he said.
Roberton Williams, a professor of environmental economics at the University of Maryland, said, "If you already have a carbon tax on products made within your borders, you want to have the same carbon tax on imports."
Ultimately, this would discourage imports of cheaper, energy-intensive products from places like China and the United States, where companies would be hit by the new tariffs.
Shi-Ling Hsu, a professor of environmental law at Florida State University, said the EU is trying to create a climate club-like organization that other countries would have to put a price on carbon emissions to join. He said, CBAM could force industry leaders and policymakers to discuss establishing a carbon pricing mechanism in the United States - even if they oppose it.
