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Border Carbon Tariff

Summary

A Border Carbon Tariff is a fee charged on imported goods based on the amount of carbon dioxide (CO₂) emissions generated during their production. It aims to prevent "carbon leakage" by ensuring imported products face a carbon price comparable to that of goods produced domestically under stricter climate regulations.

  

A Border Carbon Tariff, often referred to as a Carbon Border Adjustment Mechanism (CBAM) in the context of the European Union, is a crucial climate policy tool at the intersection of trade and environmental regulation. Its primary purpose is to level the economic playing field between domestic producers, who must pay a price for their carbon emissions (e.g., through the EU Emissions Trading System), and foreign producers in countries with less stringent climate policies. By placing a levy on carbon-intensive imports, it prevents companies from moving their production to regions with lax environmental laws to cut costs—a phenomenon known as "carbon leakage."

This mechanism is fundamental to protecting the competitiveness of domestic industries committed to decarbonization and ensuring the effectiveness of regional climate policies. It incentivizes non-EU countries to adopt their own carbon pricing systems, fostering a global effort to reduce greenhouse gas emissions.

How a Border Carbon Tariff Works

The implementation of a border carbon tariff, like the EU's CBAM, follows a clear process:

  • Scope Definition: The policy first targets specific sectors with a high risk of carbon leakage and significant emissions, such as cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen.
  • Emissions Reporting: Importers are required to declare the total greenhouse gas emissions "embedded" in the goods they bring into the tariff zone (e.g., the EU) on an annual basis.
  • Purchase of Certificates: To cover these declared emissions, importers must purchase special carbon certificates. The price of these certificates is directly linked to the weekly average auction price of allowances on the domestic carbon market, such as the EU Emissions Trading System (EU ETS).
  • Adjustment for Foreign Carbon Prices: If an importer can prove that a carbon price has already been paid in the country of origin, that amount can be deducted from the final tariff. This encourages global adoption of carbon pricing.

Concrete Example

Imagine a French construction company that can import steel from two sources:

  1. A German steel mill, which is subject to the EU ETS and must buy EU Allowances (EUAs) to cover its CO₂ emissions. This cost is factored into the final price of the steel.
  2. A mill in a country with no carbon pricing policy. Historically, its steel would be cheaper because it doesn't bear any cost for its pollution.

With the Border Carbon Tariff (CBAM), the French company importing steel from the non-EU country must now buy CBAM certificates to match the embedded carbon emissions. This extra cost makes the imported steel's price comparable to the German steel, eliminating the unfair cost advantage and encouraging the purchase of cleaner, locally-produced steel.

External Resource: For official details, see the European Commission's documentation on the Carbon Border Adjustment Mechanism.

Frequently Asked Questions

What is a Border Carbon Tariff?
A Border Carbon Tariff, often called a Carbon Border Adjustment Mechanism (CBAM), is a climate policy tool that places a levy on carbon-intensive imports to level the economic playing field between domestic producers who pay for their carbon emissions and foreign producers in countries with less strict climate policies. It prevents "carbon leakage" by discouraging companies from relocating production to regions with lax environmental laws.
How does a Border Carbon Tariff work?
The implementation process includes:
  • Scope Definition: Targeting sectors with high carbon leakage risk and emissions, such as cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen.
  • Emissions Reporting: Importers declare the total greenhouse gas emissions embedded in their goods annually.
  • Purchase of Certificates: Importers buy carbon certificates priced according to the domestic carbon market, like the EU Emissions Trading System (EU ETS).
  • Adjustment for Foreign Carbon Prices: Deductions apply if a carbon price was already paid in the country of origin, encouraging global carbon pricing adoption.
Can you provide a concrete example of a Border Carbon Tariff in action?
Imagine a French construction company importing steel from two sources:
  1. A German steel mill subject to the EU ETS, which factors carbon costs into steel prices.
  2. A mill in a country without carbon pricing, making its steel cheaper due to no pollution costs.
With the Border Carbon Tariff (CBAM), the French company must buy CBAM certificates for steel imported from the non-EU country to match embedded carbon emissions. This removes the unfair cost advantage and encourages buying cleaner, locally-produced steel.
Where can I find official information about the Carbon Border Adjustment Mechanism?
For official details, see the European Commission's documentation on the Carbon Border Adjustment Mechanism.
Other Terms (Policy Instruments & EU Initiatives)