EU Reaches Agreement on Carbon Border Adjustment Tax

The European Parliament and Commission, after 10 hours of negotiating, reached an agreement on the scope of the CBAM, which is expected to begin its data collection phase Oct. 1 next year. Exporters of goods covered by the CBAM -- electricity, fertilizers, hydrogen, steel, aluminum, cement and some precursors of those goods -- will need to report the carbon content of those goods, including, to some extent, indirect emissions, such as from the electricity needed to produce the aluminum.

None of the initial products is a major export of the U.S. to Europe, though kaolin and kaolinic clays, an input for cement, is something the U.S. exports to Belgium, Finland and Germany in some quantity. Across those three countries, U.S. exports were more than $100 million in 2021, according to Trendeconomy.com.

It's not clear when importers will start paying taxes as part of the CBAM -- the current proposal is in 2026, but the timing is going to be negotiated this weekend, according to Mohammed Chahim, the EU's parliamentarian who is shepherding the bill through that body. Chahim, known as a rapporteur, told reporters Dec. 13 that the CBAM "will be reality."

A reporter asked Chahim if membership in the G-7 "climate club" would exclude those countries' exporters from the tax (see 2212090042). He said it would not.

"The only way to be exempted is if you have an explicit carbon price. That's it," he said. California and some Northeastern and Mid-Atlantic states in the U.S. have a cap and trade system that creates a price on carbon, but most of U.S. industry is not covered by a price on carbon. Canada does have a price on carbon in all of its provinces.

Chahim said politicians' goal is to include all industrial goods covered in Europe's emissions trading system (ETS) by 2030 at the latest -- that would cover chemicals and plastics, which are significant U.S. exports. He said there is already specific wording in the bill on reviewing the inclusion of organic chemicals and polymers.

Pascal Canfin, chair of the parliament's environment committee, told reporters that the sectors that are covered now make up 55% of the EU's industrial carbon emissions. He defended the limited list of products protected by CBAM at the initiation of the program. "We need to start focused and simple, otherwise it will be a nightmare," he said.

There could be new products added one year before the taxes begin to be collected, he said -- which could be as early as 2026.

Chahim said the EU would love for more of its trading partners to set a price on carbon, so that less money is collected by EU governments on imports but the world advances more quickly in limiting its greenhouse gas emissions. If those countries' carbon prices are lower than the EU's, the CBAM would collect the difference between the two.

"To avoid double protection of EU industries, the length of the transition period and the full phase-in of the CBAM will be linked to the phasing out of the free allowances under the ETS. This will be negotiated later this week in connection with the revision of the ETS and the results integrated into the CBAM regulation," the EU announced, as it announced the deal on Dec. 13.