Is an EU carbon border tax on the horizon?

13 May 2021

Not only are carbon border taxes an interesting policy proposal in theory (on which we recently reflected here), but something that some EU industries are actively calling for to ensure their economic survival.                                                       

As the effect of the EU's Emissions Trading Scheme (ETS) on EU carbon prices has become harder to ignore for many carbon-intensive industries (steel, petrochemicals etc.), an increasing number of industry participants are calling for measures to counteract the competitive disadvantage they are feeling as a result.  One such measure is a carbon border tax.

The logic is as follows. The ETS allocates a fixed number of emissions allowances each year which market participants can trade among themselves. In line with the ultimate goal of reducing emissions, the EU reduces the number of allowances each year. If supply goes down while demand does not reduce as quickly, price goes up.  At a certain point, affected businesses must pass this price onto their purchasers, thereby limiting their ability to price their goods competitively in the global market. For example, one steelmaker is reported to have introduced a per tonne carbon surcharge on metal produced in Europe to cover its rising costs.

Those calling for a border tax on carbon-intensive products entering the EU hope it would help neutralise the price advantage manufacturers located outside the EU enjoy over those subject to the ETS. But the impetus for such measures has limits: some companies that have been pro-actively managing their exposure to carbon price increases note that they aren’t feeling the pinch as acutely. It is therefore far from certain that these calls will lead to action.

Nonetheless it will be interesting to see if the UK's own Emissions Trading System will provide a catalyst for similar support for a carbon border tax in the UK context.