EU Carbon Border Tax
Carbon Border Tax Will Raise €10bn for EU
On Wednesday, July 14th, the European Commission put forward plans for the world’s first Carbon Border Tax. This is also known as the Carbon Border Adjustment Mechanism (CBAM). As part of efforts to tackle global warming, it is speculated that the this import tax will raise around €10 billion for the EU. The key sectors affected will be the imports of aluminium, fertilisers, electricity, and steel.
Last year, the European Commission launched initiatives to push the EU towards reaching its goal of climate-neutral by 2050. The plans for this goal included both a revision of the Energy Tax Directive (ETD) and the formation of the Carbon Border Adjustment Mechanism (CBAM). The intention is to steer countries towards a more sustainable economy.
In conjunction with this, since the beginning of 2021, the EU has instigated a levy of 800 euro per tonne of non-recyclable plastic packaging within the European Union.
From 2023 until 2025, a Carbon Border Tax will incrementally come into effect for all imports. During this time, importers will be required to report on the emissions within their goods without paying the adjustment. This transitional time is to allow businesses time to adjust. It is expected that the revenue eventually derived from this tax will go towards the cost of the EU’s €750bn recovery fund. This was money used to support member states during the global pandemic.
What is the Carbon Border Tax?
When EU-based companies create products they will be required to purchase a permit for climate-warming carbon emissions. In turn, this raises the product cost and it is hoped will encourage companies to reduce their emissions. However, companies based outside of the EU do not face similar rules.
This means that the imports are then sold cheaper in the European Union. There are concerns that the manufacture of products will be outsourced beyond the EU to avoid these taxes. This is known as a ‘carbon leakage’. To avoid this undermining, the CBAM will adjust the price of imports to accurately reflect the carbon content.
As the EC has stated, “EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer. The CBAM will help reduce the risk of carbon leakage by encouraging producers in non-EU countries to green their production processes.”
Far Reaching Impact of the Environmental Taxes
The final impact on businesses of these taxes has yet to be ironed out. There are further questions around who will be the final payer of these new taxes. There are also wider implications of further tax changes beyond what has been initially proposed. This speculation is due in large part to the EU’s thinking that tax reforms “can boost economic growth and resilience to climate shocks and help contribute to a fairer society and to a just transition.”
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