European Nations Endorse Plan to Impose Carbon Imports Levy

(Bloomberg) -- European Union governments backed a proposal that would slap an import levy on iron and steel, cement and aluminum produced in countries with lower environmental standards as the bloc seeks to shield domestic producers during an ambitious green overhaul.

EU finance ministers decided on Tuesday on their negotiating stance for talks with the European Parliament about the so-called carbon border adjustment mechanism. Proposed by the European Commission in July as part of a massive green overhaul, CBAM would impose a penalty for bringing into the bloc emissions embedded in goods that also include fertilizers and electricity.

“This is a huge step forward on reduction of carbon emissions within our borders,” French Finance Minister Bruno Le Maire told the ministerial meeting in Brussels. “We will be the first continent to adopt that kind of mechanism. This is a great victory for European ideas.”

The levy will be based on costs domestic producers already face in the EU carbon market. It will gradually replace the system of handing out free pollution permits to companies most prone to carbon leakage, or relocating production to countries with laxer climate policies. Under a proposal drafted by France, which holds the EU’s rotating presidency, details on how to phase out free allowances will be discussed under a separate law on reforming the Emissions Trading System.

France has for years called on Europe to adopt a carbon border charge and a deal on the EU Council negotiating mandate would hand President Emmanuel Macron a symbolic win before presidential elections in April. Once the European Parliament agrees on its own position in a parallel process, talks between the two institutions will start about the final shape of the measure.

Transition Period

As part of the planned agreement brokered by France, member states agreed to back the commission’s proposal of a transition period of up to three years before full entry into force of the mechanism in January 2026. Obligations of importers during that period would be limited to reporting.

Then they would have to buy special certificates at a price linked to the EU ETS. The price will be calculated by the commission as the average of the closing prices at government auctions for each calendar week. European carbon prices have soared to records this year before falling amid the Russian invasion of Ukraine.

The CBAM is part of a broader package to align the EU economy with stricter emissions-reduction targets for 2030. The EU wants to both provide a level playing field for its businesses and encourage more climate action from countries outside the bloc. But its plans are already causing diplomatic unease in countries from Ukraine to China and India. 

If the embedded emissions originate in a country that has carbon pricing, the importer would be entitled to claim a reduction in the number of CBAM certificates to be surrendered. 

(Updates with decision taken at the ministerial meeting in the first paragraph)

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