The Parliament is discussing a carbon levy on imported goods to stop companies moving outside the EU to avoid emissions standards, a practice known as carbon leakage.
As European industry struggles to recover from the Covid-19 crisis and the economic pressure due to cheap imports from trading partners, the EU is trying to honour its climate commitments, whilst keeping jobs and production chains at home.
An EU carbon levy to prevent carbon leakage
EU efforts to reduce its carbon footprint under the European Green Deal and become sustainably resilient and climate neutral by 2050, could be undermined by less climate-ambitious countries. To mitigate this, the EU will propose a Carbon Border Adjustment Mechanism (CBAM), which would apply a carbon levy on imports of certain goods from outside the EU. MEPs supported proposals for this in March 2021.
- If products come from countries with less ambitious rules than the EU, the levy is applied, ensuring imports are not cheaper than the equivalent EU product.
Given the risk of more polluting sectors relocating production to countries with looser greenhouse gas emission constraints, carbon pricing is seen as an essential complement to the existing EU carbon allowances system, the EU's emissions trading system (ETS).
- Carbon leakage is the shifting of greenhouse gas emitting industries outside the EU to avoid tighter standards. As this simply moves the problem elsewhere, MEPs want to avoid the problem through a Carbon Border Adjustment Mechanism (CBAM).
Existing carbon pricing measures in the EU
Under the current emissions trading system (ETS), which provides financial incentives to cut emissions, power plants and industries need to hold a permit for each tonne of CO2 they produce. The price of those permits is driven by demand and supply. Due to the last economic crisis, demand for permits has dropped and so has their price, which is so low that it discourages companies from investing in green technologies. In order to solve this issue, the EU will reform ETS.
What the Parliament is asking for
The new mechanism should align with World Trade Organisation rules and encourage the decarbonisation of EU and non-EU industries. It will also become part of the EU's future industrial strategy.
By 2023, the Carbon Border Adjustment Mechanism should cover power and energy-intensive industrial sectors, which represent 94% of the EU's industrial emissions and still receive substantial free allocations, according to MEPs.
They said that it should be designed with the sole aim of pursuing climate objectives and a global level playing field, and not be used as a tool to increase protectionism.
MEPs also support the European Commission proposal to use the revenues generated by the mechanism as new own resources for the EU's budget, and ask the Commission to ensure full transparency about the use of those revenues.
The Commission is expected to present its proposal on the new mechanism in the second quarter of 2021.
Learn more about the EU's responses to climate change