One of the main reasons for the EU to promote CBAM is to prevent “carbon leakage”, i.e. to prevent European companies from moving out of the country to avoid strict greenhouse gas reduction policies, in order to create a so-called level playing field and to explore a pathway to a global carbon price. The introduction of a global carbon tax is seen by economists and environmental activists as an effective way to promote industrial decarbonisation, but in practice faces multiple challenges at the political and trade levels.

Wang Mou, a researcher at the Institute of Ecological Civilisation at the Chinese Academy of Social Sciences, told that the carbon border adjustment mechanism places EU companies and developing country companies on an equal footing in terms of carbon taxation, completely ignoring the principle of “common but differentiated responsibilities” between developed and developing countries. This is arguably a unilateral measure to be implemented by the EU and is not in line with the multilateral consensus rules under the UN Framework Convention on Climate Change. The vast majority of developing countries are opposed to carbon tariffs, and some developed countries are also very cautious about them.

The birth of the carbon border tax

2021 marks the 16th year of the European carbon market, and the price of carbon allowances has risen to a level of €58 per ton of CO2. And the EU’s ambition is to extend its carbon market to a wider region.

The EU plans to achieve carbon neutrality by 2050, and to this end, it issued the “European Green Deal” in December 2019, one of the core elements of which is a “carbon border adjustment mechanism”. At the World Economic Forum in Davos in 2020, von der Leyen “hammered” large fossil fuel producers, claiming that if they did not put a price on carbon emissions at home, they would risk an EU carbon tax on imports. Now, it is taking it one step at a time.

In March this year, the European Parliament voted to adopt the CBAM bill. A transitional period between 2023 and 2025, during which importers will be required to monitor and report on the carbon emissions of their products, is planned.

“This will provide an incentive for producers in third countries to reduce their emissions,” the Commission said, stressing that other countries will not be subject to the carbon border tax if they adopt measures equivalent to the EU’s response to climate change. In simple terms, if the industrial company in question comes from a country or region that does not have a similar carbon tax policy, its products will be subject to a detailed carbon audit when exported to the EU and it will have to pay for those emissions.

In the past, there was a carbon tax ‘test’ in the EU, when in 2012 the EU included aviation emissions in the EU Emissions Trading System (EU-ETS), which regulated all flights taking off and landing in Europe, and if their carbon emissions exceeded the cap, they would have to pay for the excess or be fined. However, this unilateral measure caused a global uproar at the time and was strongly opposed by countries such as China and the US.

Now CBAM is also facing difficulties, as it requires the agreement of the 27 EU member states and the European Parliament to legislate, which is not an easy task. For example, countries like Poland, which are still highly dependent on fossil fuels, do not even agree with the EU’s plan to achieve carbon neutrality by 2050, let alone CBAM.

The way forward for developing countries

The UN Trade Development Organisation (UNCTAD) warned on 14 July that CBAM could change trade patterns in favour of resource-efficient countries with lower carbon emissions from industrial production, but could have a negative impact on developing countries’ exports. If the EU were to set a carbon price of 37 euros (about RMB 282.6) per ton, developing countries targeted for restrictions would see their exports from carbon-intensive industries fall by 1.4%.

And those most affected by the CBAM are likely to be Russian, Chinese and Turkish companies, which export large quantities of products to the EU in the fertiliser, cement and steel sectors. China is one of the EU’s largest trading partners and the implementation of the carbon tariff will undoubtedly have a negative impact on China’s export trade to Europe. Although the current scheme of the EU’s carbon border adjustment mechanism involves relatively limited export industries and products in China, from the design of its mechanism, it may expand to more industries and products in the future, including the whole life cycle carbon emissions of products, so that the areas and industries involved will grow significantly, posing a challenge to the normal economic and social development of China and other developing countries.

Besides, a major point of contention over the carbon border tax is whether it is compatible with the provisions of the World Trade Organisation (WTO). After a video conference with BRICS trade ministers in late June, Russian Economic Development Minister said that some countries were discussing the EU-driven carbon tariff as being incompatible with WTO rules and that “Russia is extremely concerned about the use of the climate agenda to create trade barriers”.

Developing countries are not left in a passive position in the face of the potential threat of “climate protectionism”. China launched its long-planned national carbon emissions trading market on 16 July, making it the world’s largest market covering greenhouse gas emissions. Russian President Vladimir Putin signed the country’s first draft climate law on 2 July, which introduces a carbon emissions reporting mechanism that will come into force from 2023.

The World Bank also announced a new climate change action plan in June that will provide unprecedented levels of climate finance to developing countries to help them reduce their carbon emissions.

Options for the US

On the same day that the EU announced its climate governance package, news broke in the US that Democrats are drafting plans to impose taxes on imports from specific countries, mainly targeting those that have not adopted active policies to address climate change. In an interview with US media, US Senator Ed Markey said that this policy would preserve US leadership in the climate change crisis.

Unlike the EU’s detailed 291-page document, the US Democrats’ plan, called the “polluter import fee”, is only a vague framework that neither explains how the tax would be levied nor accounts for the size of the tax.

According to the US political news website Politico, senior US and European officials held private discussions on a carbon border tax in May this year, and the talks highlighted the vast differences in climate policy between the two sides, with Europe well on its way to advancing proposals while the Biden administration has barely begun to design a policy.

However, the Europeans are not stopping to wait for their allies across the Atlantic, but are still hoping that the US will be on the same side as the EU. “Our partners can take other approaches, just make sure we are on the same page — climate neutrality by 2050,” said EU climate policy chief Frans Timmermans at an event in June.

All in all, it is foreseeable that climate governance discussions, including a carbon border tax, will become more widespread globally, especially with the UN Climate Change Conference taking place in Glasgow, UK, this November, which is seen as the most important climate change conference since the “Paris Agreement” was drafted in 2015, and one would expect to see more action than just words.

By Sherry Song Dhu