Gas tanks on the river Nieuwe Maas approaching Rotterdam, Netherlands at sunset.

EU Lawmaker Wants Carbon Border Tax to Cover More Goods, Enter Into Force Sooner

Mohammed Chahim, the lawmaker leading the European Parliament’s work on an EU carbon border tax, has submitted a draft report on the legislative proposal to establish a carbon border adjustment mechanism. It will be reviewed by the parliament’s environment committee in February.

January 12, 2022

The lawmaker leading the European Parliament’s work on a European Union (EU) carbon border tax has proposed expanding the products to be covered, rolling the levy out faster, and reducing the transition period for sectors at risk of “carbon leakage”—heavy industry fleeing Europe for countries with lower environmental standards as the bloc decarbonizes. Mohammed Chahim also called for extra climate finance for poor countries hit by the planned tax on carbon-intensive goods imported to the EU.

Chahim, a Dutch centre-left Member of the European Parliament, submitted a draft report to the parliament on January 5. The document, which is dated December 21, 2021, and has yet to be made public, is a response to the European Commission’s proposal for trade partners to pay a carbon price equivalent to that paid by EU businesses. It is set for debate next month in the European Parliament, as part of the trialogue process—negotiation among the commission, the parliament, and the Council—to finalize the legislation.

The proposed carbon border adjustment mechanism (CBAM) would impose charges on certain imports for emissions that are released when these products are manufactured in the country of exportation. It aims to protect local manufacturers by making importers pay for emissions embedded in certain goods.

“Today we sent our draft report on the legislative proposal to establish a carbon border adjustment mechanism to the shadow rapporteurs,” Chahim wrote on Twitter on January 5. “The Commission proposal is an excellent starting point, but I see room for improvement in several areas.”

He listed the main suggestions: broadening the CBAM to include organic chemicals, hydrogen, and polymers; adding coverage of indirect emissions after the transitional phase; shortening the transitional phase to 2 years from 3, so there is a faster phase-in of the mechanism; a faster phase-out of free allowances; a centralized system with one EU CBAM authority rather than the decentralized system envisioned by the commission; and exempting only trade partners with explicit carbon pricing policies in place.

Dealing With Low-Income Nations and Exemptions

The commission wants to have the mechanism in place by 2023, with a transitional period through 2025. During this period, importers would be required to meet demanding administrative and reporting obligations on the emissions resulting from the goods they import. Products covered by the CBAM—possibly expanded during a review planned before the end of the transitional period—would be subject to the carbon tax as of 2026. The new rules will affect non-EU producers and suppliers of the goods, as well as importers and downstream EU sectors.

The products covered under the commission plan are aluminum, cement, electricity, fertilizers, iron, and steel. Tim Gore, who heads the climate and circular economy program at the Institute for European Environmental Policy, forecasts that CBAM would generate EUR 9.1 billion (USD 10.3 billion) a year by 2030, EUR 2.1 billion of which would be collected directly at the border. The remainder would come from phasing out the free allocation of emissions allowances to EU producers in those sectors. Under Chahim’s proposal, free allowances would be phased out before 2029—8 years earlier than the commission recommended.

The only exemptions from the charge under the commission proposal would be imports from countries that apply an emissions trading system that is part of or fully linked to the EU’s system. The tax would be adjusted for the carbon price paid in the country of origin. The proposal has been criticized for not supporting a fair transition for certain low-income countries that rely heavily on trade with the EU and bear little responsibility for climate change. Commission Vice-President Frans Timmermans said in October that there must be “a just transition or there will be no transition.”

Chahim’s proposal would not exempt least-developed countries. But he suggests earmarking additional climate finance “at least equivalent in financial value” to the revenues generated from carbon adjustments at the border to support the decarbonization of these countries’ heavy industries. This would, in turn, lower the amount of the carbon tax in the future. Climate Home cited Chahim as saying that support for least-developed countries was necessary for the levy to comply with World Trade Organization rules.

The parliament’s environment committee will consider Chahim’s report and any amendments submitted by its members. A committee vote is scheduled for February 28.

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