EU governments have reached agreement on the world’s first large carbon frontier tax, as part of an overhaul of the bloc’s main carbon market that aims to make its economy carbon neutral by 2050.
EU ministers finalized details of a mechanism to adjust carbon limits early Sunday after reaching an interim agreement earlier in the week.
This historic measure adds a pollution price on certain imports into the EU. Carbon-intensive industries within the bloc must comply with strict emissions standards, and the tax is designed to ensure those companies are not undercut by competitors in countries with weaker rules.
The measure will first apply to iron and steel, cement, aluminum, fertilizers, electricity production and hydrogen, before extending to other commodities.
It also discourages EU companies from moving production to more tolerant countries, something EU lawmakers refer to as a “carbon leak”.
Under the new mechanism, companies will need to purchase certificates to cover emissions from producing goods imported into the EU based on calculations linked to the EU’s carbon price.
Mohamed Shahim, a Dutch socialist politician who led negotiations on the European Parliament bill, said in a statement that the measure would be a “fundamental pillar” of European climate policies.
“It is one of the only mechanisms we have to incentivize our trading partners to decarbonize their manufacturing,” he added.
But the plan has met resistance from countries including the United States and South Africa, which are worried about the impact of carbon border taxes on their manufacturers.
“There are a lot of concerns coming from our side about how this will affect us and our trading relationship,” US Trade Representative Catherine Tay said at a conference in Washington last week, according to the Financial Times.
The European Union and the United States have already raised heads over President Joe Biden’s $370 billion climate plan under the Inflation Act, which EU officials say will hurt European companies selling into the American market.
In a sign of the challenge posed by the law to reduce inflation, the latest EU agreement makes more money available for the development of clean energy technologies in Europe.
Faten Akkad, senior climate diplomacy adviser at the African Climate Foundation, warned that the EU’s carbon action could lead to a “rapid deindustrialization” of African countries that export to the EU.
Another risk is that clean energy supply in poor countries will simply shift to the production of exported goods while industry aimed at domestic consumption relies on polluting fuels, Akkad he said on Twitter. She added that certifying carbon emissions in producing countries remains a “challenge”.
The carbon cap tax is part of a broader deal agreed Sunday to overhaul the EU’s carbon market to cut its emissions by 62% by 2030, compared to 2005.
The EU’s carbon market, known as the Emissions Trading System (ETS), already caps greenhouse gas emissions from more than 11,000 power and manufacturing plants, as well as all EU domestic flights, covering about 500 airlines.
Companies receive or buy emissions permits, or “allocations,” which can be traded later. The ETS, which was extended on Sunday to include shipping, is key to the European Union’s push to become the world’s first carbon-neutral continent.
Under the recent reforms, the amount of free emissions allowances will be phased out between 2026 and 2034. The mechanism for adjusting carbon limits will be implemented in stages at the same time, in this way protecting domestic enterprises from being undercut by foreign competitors.
After nearly 30 hours of talks, negotiators also agreed to launch a new carbon market for heating and transportation fuels from 2027, with the option to delay this by one year if energy prices remain at current high levels.
“This deal will make a significant contribution to the fight against climate change at low costs,” Peter Lys, the European Parliament’s chief negotiator, said in a statement. Lisi added that the deal “will provide a clear signal to European industry that it is paying off to invest in green technologies”.
The European Parliament and Council will have to formally approve the deal before it comes into effect in 2026.