Businesses fear carbon tariff will be too complex to administer

The most controversial aspect of the European Union's latest climate plan – the proposed carbon border adjustment mechanism (CBAM) – was described by high-level industry sources as "administratively complex" and potentially damaging to the upcoming COP26 climate summit in Glasgow. Others said it might trigger to a new era of "protectionism".

The EU has pledged to be more ambitious in combating climate change and part of this means imposing greater carbon costs on businesses to drive emissions cuts. But this increases the risk of what’s known as “carbon leakage” where companies simply move their carbon-intensive production outside the bloc to avail of lax standards in other jurisdictions or where EU products are replaced by more carbon-intensive imports.

To counteract this, Brussels is proposing a carbon tariff on imports. Under the proposed CBAM, EU importers would essentially 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.

Alternatively, if non-EU producers can show that they have already paid a price for the carbon used in the production of the imported goods, EU importers can claim an exemption.

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The CBAM would apply only to certain carbon-intensive sectors – steel, cement, chemicals, fertilisers and electricity – while excluding those already covered by the EU’s emissions trading scheme such as agriculture.

The goal is a good one, namely to avoid emissions cuts on the continent being undermined by imports from third-party countries with less stringent climate policies.

Details of how it would operate in practice have yet to be worked out. However, business groups fear it would place a huge bureaucratic burden on importers as well as national authorities.

They say importing companies would need to undertake a significant amount of paperwork to verify the carbon footprint of their imported goods or that a similar carbon price had been applied in the case of exemptions.

UN climate talks

There is also a fear that such a unilateral action on the part of the EU will destabilise delicate talks and bargaining processes at the upcoming UN climate talks in Glasgow.

Influential business group European Corporate Leaders Group (CLG Europe) said that while the proposal was partly motivated by a desire to prompt stronger climate action internationally, it was likely to trigger “significant international pushback, which could undermine its goals”.

Employers' group Ibec, meanwhile, gave the proposals a cautious welcome, saying sustainable enterprises need to be rewarded, and emissions reduction in Ireland and Europe must be rooted in a decoupling of economic and emissions growth, not deindustrialisation or the export of emissions.

“The proposed carbon border adjustment mechanism is one way of doing this,” it said.

"However, it must work in harmony with the emissions trading system, which remains the main tool for industrial greenhouse gas mitigation within the European Union, " it said.