After two years' worth of negotiations, the EU member states voted to finalize the new law creating the first carbon border taxes in the world on Tuesday (April 25, 2018). The carbon border tax is a groundbreaking piece of legislation that could transform industries in the EU and beyond.
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Carbon tax is part of an overhaul of the carbon market in the EU. This will force European industries to adhere to strict emission standards, increasing production costs. The carbon tax was introduced to protect EU products that are more expensive and lower in carbon from being undercut by cheaper goods produced in countries with laxer emission standards.
Companies importing these products into the EU must purchase certificates that cover their carbon footprint, based on both the amount of goods imported and the emissions footprint. The tax will prevent manufacturers from shifting their operations abroad to avoid EU emission standards and then sending goods to the EU. This is known as "carbon leaching" (pdf).
Carbon tax will be introduced in 2026 and cover the industries that are most polluting: electricity, hydrogen, steel, aluminum, fertilizer, and cement. It could also be extended to organic chemicals, polymers and plastics in the future.
The EU is expecting to receive up to EUR14 billion ($15,4 billion) in revenue each year from the tax. It is projected that the reforms to the carbon market will reduce EU emissions by 62 percent by 2030 compared to 2005.
Mohammed Chahim said, "It's one of the few mechanisms we have that will encourage our trading partners to decarbonize the manufacturing industry in their countries," in a December statement, during the heated negotiations on the tax.
According to an Adelphi analysis, the German think-tank, products from China, who have long opposed the border tax on carbon, account for about 10% of all goods that are affected. The industries of India, UK, Korea, US, and Turkey will also be affected.
China has claimed that the tax violates principles of international trade. China submitted a proposal to the World Trade Organization in March asking the EU for a defense of its legality as well as the impact on developing countries.
The law doesn't specify any clear commitments regarding the provision of funds to help poorer countries decarbonize so that they can continue to have access to European markets.