World’s First Carbon Import Tax Approved by EU Lawmakers
The European Union Parliament approved legislation that taxes imports based on the greenhouse gases emitted to make them, clearing the last hurdle before the plan becomes law and enshrines climate regulation into global trade rules for the first time.
Tuesday's vote ends nearly two years of negotiations on the import tax, which aims to force economies around the world to put a price on carbon dioxide emissions while protecting EU manufacturers from countries that do not regulate emissions as strictly or at all. The tax gives credit to countries that set a price on carbon, allowing importers of products from those countries to deduct payments made for emissions abroad from the amount due at the EU border.
From its entry into force in 2026, companies importing products into the European Union will be obliged to buy enough carbon credits to offset the footprint of those products, which will generate an additional tax on those products to prevent them from competing at an advantage, and will also discourage European manufacturers from relocating their production to other countries and then importing them to avoid European carbon taxes, the so-called carbon leakage.
On the table are the possible effects on countries, many of them developing countries, that do not offset their emissions by resorting to the carbon credit markets, countries that depend in many cases on their trade with the European Union and that could experience a process of deindustrialization as their products become less competitive. On the other hand, China, which manufactures around 10% of the products affected, refuses to recognize the legality of the tax and argues that it violates the principles of free trade.
The tax, which includes products that generate significant emissions in their production such as steel, aluminum, cement, fertilizers or electricity, as well as hydrogen obtained from processing fossil fuels, and could in the future be extended to include organic chemicals and polymers, including plastics, will raise around 14 billion euros annually for the European Union, and is expected to result in a 62% reduction in EU emissions by 2030 from 2005 levels.
Carbon markets are one of the most important mechanisms that exist to put a price on emissions and provide a disincentive to emit. With this step, the European Union goes from simply applying these taxes to itself and its products, to forcing other countries that wish to sell to the European Union to assume them whether they want to or not, with all that this may entail, including the increase in price of many products. We will soon see the reactions to the approval of the tax and the effects it will have.
Objective 55
What is the "Target 55" package?
The "Target 55" package is a set of proposals aimed at reviewing and updating EU legislation and launching new initiatives in order to ensure that EU policies are in line with the climate objectives agreed by the Council and the European Parliament.
The aim of this package of proposals is to provide a coherent and balanced framework for achieving the EU's climate objectives that:
- Ensures an equitable and socially just transition;
- Maintains and strengthens the innovation and competitiveness of EU industry while ensuring a level playing field vis-à-vis economic operators from third countries;
- Underpins the EU's leading position in the global fight against climate change; and
What does the "Target 55" package include?
EU Emissions Trading Scheme (EU ETS)
The EU Emissions Trading Scheme (EU ETS) is a carbon market based on a cap-and-trade system of emission allowances for energy-intensive sectors and for the power generation sector. It is the EU's main tool for addressing emissions reductions. Since its introduction in 2005, EU emissions have decreased by 41 %.
The "Target 55" package aims to reform the EU ETS and make it more ambitious. The new provisions include:
- Extension to emissions from shipping;
- Faster reduction of allowances in the system and phasing out free allowances for some sectors;
- The implementation of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) through the EU ETS;
- Increased funding for the Modernization Fund and the Innovation Fund;
- Revision of the market stability reserve.
In addition, a new independent emissions trading scheme is created for buildings, road transport and fuels for other sectors.
The Environment Council adopted general guidance on the review of the EU ETS in June 2022. In December 2022, the Council reached a provisional agreement with the European Parliament. This provides for an increase to 62% in the overall ambition for emission reductions by 2030 in the sectors covered by the EU ETS, compared to the 61% target proposed by the Commission.
Also in December 2022, the Council and the European Parliament reached a provisional political agreement on the revision of the EU Emissions Trading Scheme (EU ETS) rules applicable to the aviation sector. The agreement ensures that aviation contributes to the EU's emission reduction targets under the Paris Agreement.
The Council also adopted a Decision on the Market Stability Reserve, which is part of the EU ETS, in March 2023. It formally adopted the revision of the EU ETS in April 2023.
Goal 55: reducing emissions from transport, buildings, agriculture and waste
One of the elements that will contribute to these targets is the revision of the Effort Sharing Regulation (ERR), which updates Member States' current 2030 emission reduction targets for sectors such as transport, buildings, agriculture and waste.
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