A new European Union carbon border tax starting its trial period in the week beginning October 1 and will raise the price of an average car by almost €600, said Boston Consulting Group.
The EU’s Carbon Border Adjustment Mechanism (CBAM) will make importers pay a tax on carbon emitted in the manufacture of carbon-intensive items such as steel and cement that come from outside the EU.
An average four-door car “contains around seven metric tonnes of embedded CO2 emissions, just under half of which come from the steel and aluminium used in its production”, said the management consultancy.
At current carbon prices of approximately €82.90, this means the average car’s price will increase by €580.30 – the price of a carbon credit under the EU’s Emission Trading System (ETS).
EU manufacturers had already needed to purchase carbon credits through the ETS to make such goods within the bloc.
Therefore, the new mechanism, forming part of European Commission President Ursula von der Leyen’s 2020 European Green Deal, makes businesses pay the same carbon levy if they bought or manufactured them overseas, too.
While the CBAM levies will come into force in January 2026, businesses face new reporting requirements from this year, with the first coming due in three months.
Experts say many businesses that import from overseas are unprepared or even unaware of the new rules.
“It is a big deal that businesses haven’t woken up to yet,” Ernst and Young partner Mark Feldman told Brussels Signal.
The EU’s efforts to engage businesses “have fallen short”, said Anuj Saush, head of think-tank The Conference Board’s Environmental, Social, and Governance Centre.
For example, “guidance and support materials were only published in August”, he said, even though the new policy’s success or failure “depends on businesses getting it right”.
It could be an expensive problem for companies that get the new measures wrong.
Firms missing the reporting requirements would face penalties up to €50 per tonne of carbon emissions in the trial phase, which from 2026 would increase to the EU carbon price (currently at €82.90 per tonne).
Brussels is attempting to create a global standard with its new carbon border tax but it is still facing lingering challenges over its legality.
“It’s a unique instrument in international trade law, first of a kind – never seen under GATT and WTO before,” international trade lawyer Bogdan Gecic told Brussels Signal.
The EU was “trying to turn it into a golden standard like the GDPR, with the Brussels Effect,” he added.
Legal challenges facing the new carbon measure include those from within the EU.
Poland announced in late August it would challenge the CBAM before the European Court of Justice. The measure should have required a unanimous vote instead of going through a qualified majority procedure, Warsaw argued.
Also, the carbon border tax could raise energy costs unevenly across the EU, conflicting with the principle of energy solidarity, said Poland’s climate minister Anna Moskwa.
Brazil, South Africa, India and China have argued that the border tax unfairly discriminates against them. Russia, Turkey and Ukraine would likely be the countries hardest hit.
A number of them would probably raise their disputes against the EU in the World Trade Organisation but to do this would they need to wait until 2026 so they could demonstrate any claim of harm.
The WTO could then rule against the EU if it found the tax charged different countries different prices for identical goods, or if it treated foreign products differently to domestic ones.