Carbon pricing and international trade: what changes starting October 1st

Europe’s carbon tax will officially enter its trial phase on October 1, 2023. From this date, companies will be required to report the amount of materials such as cement, iron and steel, aluminium, fertilisers, electricity and hydrogen, that they have imported into the EU and relative CO2 emissions generated. This transitional phase will run until 31 December 2025, when carbon pricing will start applying.

The Carbon Border Adjustment Mechanism (CBAM) or carbon tax, is part of the European Commission's Fit for 55 package aiming to reduce greenhouse gas emissions by at least 55% by 2030, compared to 1990 emission levels. 

The Mechanism is intended to complement the current EU Emissions Trading System (EU ETS) and to level the playing field between EU and non-EU businesses, ensuring that production of carbon-intensive goods does not shift to third countries to take advantage of less stringent climate policies. All with an eye to encourage other countries in the world to join the EU's climate efforts by introducing their own measures to tax or price emissions. 

As Europe strives to set a global example, CBAM will impose significant constraints on European downstream industry compared to non-European countries, creating important market imbalances that may end up deteriorating European competitiveness. “Products manufactured abroad and imported into the EU will have an unfair competitive advantage over European manufactured products on the EU Single Market,” explained APPLiA Digital & Competitiveness Policy Manager Alvaro Vilas. European downstream industries such as the home appliance sector, compete with non-EU producers who purchase their materials from suppliers where no carbon price applies and are thus able to offer their products at lower prices, all other cost factors being equal. Therefore - he continued - “the carbon will simply be emitted elsewhere making carbon-intensive downstream products more competitive than sustainable alternatives”, overall aggravating the total balance of carbon emissions.

In turn, this creates an incentive for carbon leakage. The phasing-in of CBAM and the phasing-out of free ETS allowances will lead to a carbon cost increase of 580 million € for EU home appliance manufacturers, without considering additional costs generated on electricity. This has a twofold effect, explained APPLiA Director General Paolo Falcioni: “it stimulates businesses to transfer production outside of Europe,” and “it results in a loss of economic competitiveness for the sector and for European industry at broad.” 

All in all, the levy will not only deteriorate the business-case of European manufacturers against non-EU competitors, but it would also make it cheaper for consumers to purchase less sustainable imported finished goods with an ultimate loss in sustainability. 

Ensuring the effectiveness of the Carbon Border Adjustment Mechanism (CBAM) necessitates engaging world leaders in a multilateral approach that adheres to World Trade Organization (WTO) rules. Given the interconnectedness of the global economy and the borderless nature of environmental pollution, the effectiveness of measures like carbon pricing is not maximised, if it is adopted by Europe alone. Collaborative, worldwide action is essential to ensure that emissions are reduced on a global scale and that the transition to a low-carbon economy is universally undertaken. “Europe’s efforts in carbon pricing and decarbonisation can set a precedent, but the true impact will only be felt when these practices are embraced globally,” underlined Falcioni. Multiple geographies working in tandem to decarbonise can enhance the effectiveness of carbon pricing, facilitate the sharing of green technologies and practices, and contribute more significantly to the global fight against climate change.