EU carbon tax trials raise global trade concerns

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The European Union (EU) initiated trials of its pioneering Carbon Border Adjustment Mechanism (CBAM) on Oct 1. After a month of testing, concerns are growing about its global trade implications.

CBAM has a dual objective: to ensure fair competition in the market and to curb carbon leakage (a situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission standards).

The mechanism will be in a transition period until Dec 31, 2025, before being formally implemented on Jan 1, 2026, although full enforcement will not start until 2034.

While designed to promote green technology, CBAM has stirred concerns of potential market protectionism, possibly clashing with World Trade Organization principles. The EU itself admits it’s pursuing a mission of preserving European industrial competitiveness while pushing other countries to align with its green policies.

CBAM currently covers industries like steel, aluminium, power, cement, fertilizers, and hydrogen, which encompass a significant share of heavy industrial products. In later amendments, the list has been expanded to include organic chemicals and plastics, hinting at broader coverage in the future.

China faces particular scrutiny. A recent report on “China’s Top 100 Listed Companies’ Carbon Emissions (2023)” revealed these companies emitted around 5.05 billion tons of CO2 in 2022, nearly half of China’s total emissions that year. The most substantial emissions came from power, cement, and steel sectors, making up 75.48 percent of the top 100 companies’ total emissions.

For nations focused on industrial production and exports, CBAM will raise export costs, intensify competition for basic commodities, and risk the survival of high-pollution, high-energy-consumption companies.

Companies exporting to the EU must cover additional administrative costs for the reporting and verification of emissions. And this burden may eventually trickle down to consumers. Meanwhile, the EU needs to strengthen its customs systems, resulting in more bureaucratic procedures and inspections for companies.

A survey by the International Chamber of Commerce found that 83 percent of European respondents believe carbon taxes will increase import prices, and 75 percent anticipate changes in their import choices due to CBAM.

Trade partners of the EU, including the U.S., China, India, Brazil, South Korea, and South Africa, have criticized the EU’s unilateral tax imposition as a form of “disguised green protectionism.” The carbon tax could further complicate international trade and boost export costs for non-EU manufacturers.

Industries most affected downstream include automobiles, construction, packaging, and consumer electronics, with these industries being the largest user groups within CBAM’s scope. By 2032, steel costs imported to the EU from different countries could increase substantially, notably from India.

As the world watches these trials unfold, the economic and environmental impacts of the EU’s carbon border tax continue to raise questions in the realm of global trade.