The European Union’s Carbon Border Tax on Imported Goods Enters A Trial Phase

The European Union Carbon Border Tax Adjustment Mechanism takes aim at fossil fuel emitters from outside Europe (Freerangestock)

The European Union’s Carbon Border Adjustment Mechanism (CBAM) has entered a trial phase as of October 1, 2023. This means that the EU’s trading partners will now need to report emission levels tied to key exports, including steel, iron, aluminum, fertilizer, hydrogen, and electricity.  For now, firms are required only to report emissions, and payment adjustments will not take effect until 2026.  However, companies that fail to report can still face regulatory fines.  The initiative is part of the EU’s broader economic agenda, which is geared towards reaching net-zero greenhouse gas emissions by 2050. 

The goal of CBAM is to protect European firms from unfair competition from foreign companies that are not as strictly regulated. Goods produced inside the EU are subject to the carbon price under the EU Emissions Trading System, or ETS. CBAM will apply a comparable carbon levy to goods imported from other countries so that foreign competitors cannot undercut domestic firms with lower prices by taking advantage of less stringent regulatory requirements outside the EU. 

The program accounts for goods that are taxed or regulated by the country of origin based on the level of carbon emissions in production. Upon successful conclusion of the trial phase, companies shipping goods into the bloc will be required to purchase credits called CBAM certificates that will put a price on emissions from production. If a given company’s emissions are already subject to domestic carbon pricing, that amount can be deducted from the CBAM certificates required for purchase upon entry into the European market. In this way, the adoption of CBAM compels other countries to adopt more stringent environmental oversight of the private sector so their companies can deduct more from their CBAM certificates.

Throughout 2023, the proposed rolling out of CBAM has received criticism from key EU trading partners, particularly those deeply invested in the industries targeted by the tax.  China has aired its grievances to the World Trade Organization (WTO) and cast doubt on how the proposed program respects the multilateral trade system. In June 2023, China’s WTO ambassador, Li Chenggang, railed against CBAM and other EU trade proposals that he called “unjustified and discriminatory.”  

The Australian Minister for Trade, Dan Tehan, criticized the proposal, warning that it will lead to increased protectionism and will be difficult for Brussels to reconcile with WTO policy.  The United States, similarly, has already requested an exemption for its steel and aluminum imports to the region.