What will the EU carbon tariff bring to the world?

The 26th Conference of the Parties to the United Nations Framework Convention on Climate Change recently concluded in Glasgow, UK.
The conference further forged international consensus on promoting low-carbon energy transition
.
Meanwhile, carbon tariffs are a hot topic
.

On July 14, 2021, the EU proposed a package of environmental protection proposals including the establishment of a carbon border adjustment mechanism (CBAM)
.
A carbon border adjustment mechanism can be defined as "a system that applies to traded products so that the market price of the product in the place of sale reflects the cost of carbon emission regulation in the local market"
.
In short, the EU will levy taxes on steel, cement, aluminum and fertilizers imported from countries and regions with relatively loose carbon emission restrictions, which is essentially a special tariff levied on products imported in international trade.
, so it is commonly known as the "carbon tariff"
.
The EU carbon tariff is scheduled to be implemented from January 1, 2023, or it may become the first climate-related measure that has a profound impact on global trade rules, which has aroused great concern around the world
.

The Development History of EU Carbon Tariff

The prototype of the carbon tariff concept appeared in the "Kyoto Protocol", which was adopted in December 1997 and took effect on February 16, 2005.
The original intention was to impose new tariffs on countries that did not comply with the "Kyoto Protocol"
.
In 2007, the then French President Chirac proposed that carbon tariffs should be imposed on imports from the United States in response to the US withdrawal from the Kyoto Protocol
.
In 2008, Nobel Laureate in Economics Krugman put forward a clear assumption on the rationality of carbon tariffs under the WTO framework
.
He believes that imported products that do not pay carbon tariffs have an "unfair" competitive advantage, so developed countries that have undertaken mandatory emission reduction obligations have the right to choose to take trade measures at the border, increase the cost of foreign producers of similar products, and impose restrictions on imports.
Products are taxed proportionally to the carbon dioxide they contain or emitted during production, while tax exemptions or rebates are given to products containing carbon dioxide exported from their own countries, thus achieving the purpose of "leveling the arena"
.

After the EU and its member states signed and ratified the "Kyoto Protocol", the EU developed a carbon emissions trading system, which is the world's first multi-country participation and the world's largest greenhouse gas emissions trading system
.
The EU ETS is the basis of EU carbon tariffs and a condition for the legalization of carbon tariffs in the EU
.
In December 2019, Ursula von der Leyen, President of the European Commission, launched the "European Green New Deal" at the beginning of his tenure.
transportation, construction
, etc.
Since January 2020, carbon tariffs have entered the EU legislative fast-track
.
From March to October of the same year, the European Commission went through the industry and public consultation procedures and received a total of 224 feedbacks
.
On March 10, 2021, the European Parliament adopted the non-legally binding "Towards a WTO-compatible EU carbon border adjustment mechanism", proposing that the carbon tariff mechanism should reflect the "polluter pays" principle of the EU carbon emissions trading system.
Similar foreign imports are also charged for carbon emissions
.
In June 2021, the EU's "Climate Change Law" passed the legislative process, turning the commitment to achieve carbon neutrality by 2050 into a mandatory legal constraint, and the controversial carbon tariff was legally "landed"
.

EU carbon tariff enforcement mechanism

The EU's carbon tariff legal documents are divided into 11 chapters, 36 articles and 5 annexes, which provide detailed provisions on carbon tariff-related elements
.

taxpayer
.
The taxpayers of carbon tariffs are EU importers
.
Importers must first register with the EU CBAM administrative agency and become an "authorized declarer" before they can import related products
.

The tax base and how it is calculated
.
The tax base of carbon tariffs is carbon emissions.
Adopting international practice, carbon dioxide emissions converted from fossil fuel consumption are the tax basis
.
Calculated as follows:

Emissions (tons CO2) = Mass (tons, MWh) × Emissions intensity (tons CO2/ton, ton CO2/MWh)

Scope of application
.
At the industry level, the initial carbon tariff will be limited to cement, electricity, fertilizer, steel and aluminum imported into the EU
.
On a country-by-country basis, carbon tariffs only exempt non-EU countries that have joined the EU ETS, such as Iceland, Liechtenstein and Norway, or countries linked to the EU ETS, such as Switzerland
.

Free carbon allowances
.
Carbon tariffs will coexist with free quotas under the carbon emission trading system for a long time.
During the transition period from 2023 to 2025, industries covered by carbon tariffs will receive 100% of free quotas
.
The free quota will drop to 90% in 2026, and then decrease by 10 percentage points year by year until 0% in 2035
.

payment process
.
EU importers will purchase an electronic voucher and prepay taxes for every 1 ton of imported goods, which will be settled and paid annually from January to May of the following year
.

penalty mechanism
.
Any unregistered importer who imports goods subject to carbon tariffs, or a registered importer who fails to submit and fails to submit the CBAM electronic certificate in full and on time, will be fined 100 euros per ton of carbon dioxide equivalent
.
In addition, EU member states can impose administrative or criminal penalties on businesses or individuals that fail to comply with CBAM regulations according to their national rules
.

transition period
.
The EU carbon tariff will be implemented on January 1, 2023, and the transition period from 2023 to 2025 will be implemented.
Imported products do not need to pay carbon tariffs, but importers need to submit a quarterly report including the total amount of imported products, direct and Corporate reporting including information on indirect emissions, carbon price payable in the country of origin,
etc.
In 2026, the EU carbon tariff will be fully imposed
.

EU carbon tariff implementation intentions

Maintain the competitiveness of EU companies
.
Carbon tariffs can level the carbon cost of imported products and EU products, eliminate the price advantage of imported products compared with EU products, weaken the trade competitiveness of countries and regions with loose carbon emission reduction policies, and effectively protect EU companies
.

Promote the global carbon reduction process
.
The EU is trying to use carbon tariffs as a trade means to "force" other countries to increase their emission reduction efforts, increase investment in low-carbon development, and promote the fairness of carbon reduction measures
.

Alleviate the huge financial pressure brought about by the new crown pneumonia epidemic
.
Revenue from carbon tariffs can relieve the financial pressure of EU governments to a certain extent, and can also be used to finance clean technology innovation and infrastructure modernization, or as international climate finance
.

Establish a new global governance order
.
The EU wants to use carbon tariffs to, on the one hand, sell carbon emission reduction technologies to developing countries and seize the market for clean energy and emerging industries; trade rules and establish a new global governance order
.

EU carbon tariffs spark reaction

within the EU
.
Due to the different energy structures and economic conditions of each member state, there are great differences within the EU on the imposition of carbon tariffs
.
France is a leading proponent of the EU's carbon tariff policy and has joint support from eight other EU countries
.
German industry said the carbon tariffs would increase costs in sectors such as cars and machinery, making them less competitive
.
Some other EU member states also believe that carbon tariffs will have a very limited contribution to revenue and will incur retaliatory tariffs
.

outside the EU
.
According to data from the United Nations Commodity Trade Statistics Database, in the short term, the top four countries that are negatively affected by EU carbon tariffs are Russia, Turkey, the United Kingdom and Ukraine
.
Russian Economic Development Minister Reshenikov called the carbon tariffs pushed by the EU a "dangerous" trade barrier in violation of WTO rules
.

The U.
S.
government's consideration of carbon tariffs can be described as "only state officials are allowed to set fires, and people are not allowed to light lights
.
" On March 12, 2021, Biden's chief climate adviser, John Kerry, expressed extreme concern about EU carbon tariffs, arguing that they could have important impacts on the global economy, trade and international relations
.
But starting in April, the Biden administration began to seriously consider imposing carbon tariffs
.
On July 19, following the European Union, Democrats in the U.
S.
Senate introduced a carbon tariff plan
.

British Prime Minister Boris Johnson said the Group of Seven (G7) should establish a climate alliance, and the UK will use the opportunity of the rotating presidency to actively promote carbon tariffs
.
Canada proposes to avoid the global "carbon leakage" problem with the help of carbon tariff policy on the basis of ensuring the priority of Canada's interests
.
Japan's Ministry of Economy, Trade and Industry and the Ministry of the Environment held several rounds of meetings on carbon tariffs, but they were jointly opposed by domestic manufacturing companies
.
India has expressed concern about the EU carbon tariff system, arguing that the EU should disclose the details of the implementation and conduct a legal review
.
Australian Trade Minister Tehan called carbon tariffs a protectionist act, and the Morrison government will not consider joining the carbon tariff union in the short term
.