How a carbon tax could help European products resist Chinese competition (and beyond)

The European Union’s Carbon border tax comes into force provisionally from Sunday, October 1. Designed to protect European products from competition from the top polluting countries while also forcing them to reduce greenhouse gas emissions, the tax could boomerang for trade relations.

How does tax work?

Goods produced in European bloc countries are subject to the emissions trading system, which puts a price on the carbon emitted and increases the price of these goods. Brussels last year, in order to resist competition from products produced in the most polluting countries that do not apply the same taxation. Carbon Limit Adjustment MechanismIt is known as Cbam. This means the EU’s trading partners will have to report greenhouse gas emissions linked to exports of iron, steel, cement and aluminium. The measure also applies to fertilizers as well as hydrogen and electricity.

In this first stage, third country companies are only required to report emissions associated with products they intend to export to EU territory. Actual payments of the tax are only expected from 2026, but companies that do not promptly report their emissions risk being fined. “CBAM will encourage global industry to adopt greener technologies,” European Economic Commissioner Paolo Gentiloni said in a statement. said. “This will also prevent the so-called relocalization of carbon emissions, that is, the transfer of production to countries with lower environmental standards outside our borders,” Gentiloni added.

Global pressure to reduce emissions

The EU is working determinedly on an ambitious plan to reduce CO2 emissions; It is also encouraging other countries to introduce rules that penalize carbon while also protecting their companies from competition from more polluting industries. Non-EU companies can deduct their cost carbon border tax if they are already paying their own national carbon tax. Cbam is one part of a broad decarbonisation plan for European industry that aims to reduce greenhouse gas emissions by 55% by 2030. However, according to experts, the mechanism needs to be improved: more detailed technical rules and greater guarantees are needed in monitoring compliance in Member States. Environmentalists and economists, including Nobel Prize winner William Nordhaus, argue that setting a price on carbon is necessary to create a union, including a trade union, between countries that truly aims to limit emissions.

Fear of retaliation

However, the decision to impose duties on imports sparked a range of reactions from the EU’s main trading partners. Third states complain that companies are not ready to meet the documentation requirements demanded by Brussels. They will also have to endure higher costs and increased bureaucracy. At the same time, European manufacturers fear reprisals from third countries to which EU goods are exported. Companies are afraid of losing market share, especially in the face of reactions from China and India. But there are also adverse concerns. There are those who fear that the system will be too weak and easy for third country companies to bypass.

Impact on top polluting countries

A report by think tank Carnegie Europe predicts that the impact will be most severe on the EU’s largest trading partners: China, Russia, Turkey, India, South Korea and the United States. The measure would not apply to Ukraine, a country at war, but could damage relations with the United Kingdom, which has strengthened trade with the bloc states after Brexit. Across the channel, the price set in the emissions trading system has collapsed, reaching less than half the quota in force in the European bloc; This equates to around 82 euros per metric tonne of carbon, according to the latest findings. In summary, British exporters may have to pay large taxes to the EU. Protests that have already emerged include one from Brazil, India and South Africa, which described the tax as a “discriminatory” tax, according to a declaration.

trade threat

In a tit-for-tat response, New Delhi announced last week that it was planning its own carbon tax, specifically targeting EU products. Beijing, on the other hand, directly questioned the World Trade Organization (WTO) for evaluation of the measure on the grounds that it violates free trade principles. Some experts say the bill as planned would actually prevent the plan from being considered an illegal tariff under WTO-developed regulations. However, Brussels still risks being dragged into a series of disputes.

To avoid these, Washington is trying to take a different step, aiming to obtain direct exemptions for steel and aluminum. “This could also mean a change in trade models: carbon-intensive products will be harder to sell on the EU market and can be moved to third countries without carbon tariffs,” Tim Figures, an expert on the sector, told Bloomberg in Boston. Consulting Group. At this point, European states will compete with other developing and less environmentally damaging economies. Brussels will therefore be determined to find the right balance to encourage other countries to make changes. green At the same time, it continues to attract trading partners without disrupting the intensity of trade.

Source: Today IT