The EU wants to stop “carbon leakage”. Supposedly a carbon tax will do the trick…
Meet CBAM, the EU’s carbon border adjustment mechanism which looks like a tax, acts likes a tax and is indeed a tax. However, the EU says it is not a tax, but an “adjustment mechanism”.
Please consider Europe Faces Global Scepticism About its Carbon Border Tax.
The EU is due on July 14 to unveil a package of legislation to cut net greenhouse gas emissions by 55% by 2030 from 1990 levels.
As part of the plan, it will outline what it terms a carbon border adjustment mechanism (CBAM), designed to cut emissions by creating financial incentives for greener production and by discouraging “carbon leakage,” as the transfer of operations to countries with less onerous emission restrictions is known.
The bloc will want to avoid the type of fallout it incurred after a separate environmental move in 2018, when it excluded palm oil from its list of sustainable biofuels and sparked legal challenges from Indonesia and Malaysia at the World Trade Organization.
Before that, an EU attempt to charge foreign airlines for carbon emitted on flights in and out of Europe threatened a trade war after the U.S. aviation industry mustered fierce political opposition and China said it would withhold aircraft orders. The European Union was forced to announce in 2012 it would suspend the law.
Benchmark prices on the EU’s emissions trading system (ETS), the largest carbon market in the world, have this month hit records above 58 euros a tonne, partly in response to expectations of the border levy.
While the EU says it and Washington have agreed to discuss the plan, other countries have signalled concerns. Australian Prime Minister Scott Morrison calls any carbon tariffs “trade protectionism by another name”. Russia has said it may break trade rules.
The EU says it seeks to stop carbon leakage defined as shifting of greenhouse gas emitting industries outside the EU to avoid tighter standards.
The measure aims to reduce the risk of ‘carbon leakage’ (ie a process whereby production moves outside of the EU to areas with weaker climate regulation), by requiring exporters to the EU to pay a carbon price at the EU border equivalent to that faced by EU producers under the EU Emissions Trading Scheme (ETS).
Third countries may be either directly impacted, if their exports to the EU are covered by the CBAM, or indirectly impacted, if their exports are embedded in the EU value chain of products covered by the CBAM. The scope of sectors covered by the CBAM is therefore the key question to determine which climate vulnerable countries may be directly or indirectly impacted.
Based on the EC draft list, likely impacted countries include: Mozambique, Guinea, Sierra Leone, Ghana, Cameroon (aluminium), Zimbabwe, Zambia (steel), Morocco (electricity), Algeria, Egypt, Trinidad & Tobago (fertilisers).
For aluminium, Mozambique looks set to be impacted more strongly than China, and Cameroon more strongly than India; for iron/steel, Zimbabwe looks set to be impacted at least as strongly as, if not more so than, any of the BASIC countries
CBAM is not a tariff, but an environmental measure set up at the border to adjust for internal EU regulation.
Not a Tax Nor a Tariff
Someone is going to foot the bill and in this case it appears that EU consumers and third-world countries mentioned above will take the hit more so than China.