World’s First Carbon Import Tax Approved by EU Lawmakers

Date: Wednesday, April 19, 2023
Source: Wall Street Journal

The European Union’s parliament approved legislation to tax imports based on the greenhouse gases emitted to make them, clearing the final hurdle before the plan becomes law and enshrines climate regulation in the rules of global trade for the first time.

Tuesday’s vote caps nearly two years of negotiations on the import tax, which aims to push economies around the world to put a price on carbon-dioxide emissions while shielding the EU’s manufacturers from countries that aren’t regulating emissions as strictly, or at all. The tax gives credit to countries that put a price on carbon, allowing importers of goods from those countries to deduct payments made for overseas emissions from the amount owed at the EU’s borders.

The tax has raised concerns in the U.S., where companies worry the plan would erect a web of red tape for companies seeking to export to Europe. It has also drawn criticism from China and parts of the developing world, where manufacturers tend to emit more carbon dioxide than their competitors in Europe and rely more on coal-fired electricity.

Governments and lawmakers in other countries are already under pressure to follow suit. The U.K. is debating whether to introduce a carbon border tax, while Democrats in Congress proposed legislation to create one. Bipartisan support for the idea is growing in the U.S., said Kevin Dempsey, president of the American Iron and Steel Institute, which represents companies such as Nucor Corp. and ArcelorMittal SA.

“The U.S. and the EU have a lot in common,” said Mr. Dempsey. “The threat that we both face is steel coming from other parts of the world, China and Asia, that have much higher carbon intensity.”

Tuesday’s news prompted fresh calls in the U.S. for a similar tax. Producers of many different commodities argue it is difficult to compete with cheap, imported products that carry higher environmental footprints. Mike Ireland, president and CEO of the Portland Cement Association, said the U.S. having a similar levy would protect domestic producers.

The White House has urged the EU to give U.S. exporters credit for U.S. climate-change regulations, which don’t set a price on carbon but instead provide incentives for clean energy. But EU officials rebuffed those arguments, saying only exporters in countries that put an explicit price on carbon dioxide can enjoy a deduction from the border tax.

The EU’s legislation will at first cover imports of iron, steel, aluminum, cement, fertilizer, electricity and hydrogen. Companies will have to begin reporting the emissions of their imported goods starting in October, including the indirect emissions released by the electricity generation that powers overseas factories.

Importers will have to begin paying the tax in 2026. That date coincides with the phasing out of free allowances given to Europe’s manufacturers under the bloc’s emissions trading system. Legislation also approved Tuesday sets a schedule for completely phasing out free allowances between 2026 and 2034.

During that period, importers will only pay for the share of emissions that European manufacturers aren’t getting free. That measure is intended to treat domestic and overseas manufacturers equally, key for Europe’s arguments that its border tax doesn’t violate World Trade Organization rules that limit discrimination against foreign firms.

The price per ton of carbon-dioxide emissions for imports will be the same as the price for the EU’s emissions trading system, which covers power plants and manufacturers in most sectors. The price for an EU carbon allowance is around 90 euros a metric ton, equivalent to $98.37, and has risen significantly since the EU proposed to tighten its climate regulations in 2021.

The legislation requires importers to be authorized by European governments and included in a centralized EU registry. Companies face the complex task of determining the greenhouse gases that have been emitted to make the goods they import.

Christopher Glen, director of advocacy and public relations at the Fertilizer Institute, said the new tax could affect regional pricing and availability of notoriously volatile commodities. “This is something that seems to move us in the wrong direction,” he said.

Sara Nordin, a partner at law firm White & Case LLP focused on international trade and EU trade compliance, said businesses are starting to ask how they might be affected. Exporters in the U.S. and elsewhere will likely have to provide emissions and other data so their customers can pay the tax.

“I don’t think you can escape the impact this is going to have,” she said. “You’ll have to spend some money and effort to figure out what you have to do as a company.”

The legislation empowers the European Commission, the EU’s executive arm, to accredit companies to verify the emissions of overseas manufacturers. EU officials have said they want to foster an industry of consultants with the expertise to conduct these reviews for the continent’s importers. Among other tasks, the consultants will be hired to audit the emissions from individual factories in Europe’s trading partners around the world.

Before the war in Ukraine, Russia was the European trading partner that was expected to be hardest hit by the border tax. It exported large quantities of steel, fertilizer and aluminum to the bloc. But EU sanctions imposed because of Russia’s invasion have slashed Europe’s imports of these goods from Russia.

China is now likely to be most affected by the border tax. As of 2019, it exported around €6.5 billion goods covered by the border tax to the EU, or less than 2% of total exports to the EU.

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