Carbon border tax: EU levy justifiably penalizes carbon-intensive imports

EU recently agreed The carbon cap adjustment mechanism is a rare innovation, a tax that levels the playing field and has far more benefits.

It’s easy to see why CBAM is known to be so attractive to Europe. Companies on the continent are paying a high price for CO₂ emissions that exceed key thresholds of around 85 euros per tonne. This encourages them to adopt clean technologies. But it also increases the cost of goods produced in Europe, for example, about 20 percent for every ton of domestically produced steel.

The CBAM is designed to tax imports of steel and other carbon-intensive products, reflecting production costs in Europe. This should stop the “carbon leak” as production moves elsewhere and employment in Europe suffers.

The duty is not expected to apply to countries that have their own carbon tax in line with European standards. This makes CBAM a useful tool for pushing recalcitrant trading partners to adopt their own CO₂ pricing system. This is a big positive.

Europe accounts for less than 10 percent of CO₂ emissions. There is a limit to the impact that decarbonizing our own companies can have. CBAM brings the world one step closer to the global price of carbon, a vital anchor for turning emissions from external factors into producer costs.

There will be losers from CBAM. These will be countries exporting a lot of carbon-intensive goods to Europe, whose companies will lose their current advantages. Ukraine, Turkey, Egypt and Mozambique risk paying between $1-5bn per yearaccording to a Boston University study.

Fears that CBAM could increase inequality are well founded. Developed countries should bear most of the burden of decarbonization. But instead of unilaterally tying down European companies, a better solution would be to reallocate resources in some other way.

The most difficult question is how CBAM will be applied in the US. It does not have a carbon tax, but does have a policy to reduce CO₂ emissions. Because the cost his companies will actually incur is unclear, purists argue that the US should be caught in the CBAM net. In the real world of superpower domination, the problem is likely to be far-fetched.

The Lex team is interested in getting more information from readers. Please tell us what you think about adjusting the EU carbon caps in the comments section below.