EU carbon border tax will disrupt trade and derail climate talks

Tough days ahead for global trade and climate negotiations. The shock comes from developed countries and affects poor countries the most. The European Parliament approved the introduction of a carbon border tax (CBT) on 18 April. The CBT will become law after approval by the EU Council next month. It will allow the EU to charge a new tax on imports of steel, aluminium, cement, fertilisers, hydrogen and electricity from 1 January 2026. However, Indian exporters must share company-level emissions data with the EU from 1 October. However, the EU is not alone in making such a decision. The UK, Canada, Japan and the US are also preparing to levy CBT on imports. Most developed countries will implement some form of CBT between 2026 and 2028. CBT rates will vary by product and production process. CBT rates are not fixed, they would be calculated for each consignment. The rates will depend on the intensity of the product's emissions, including built-in emissions. These may vary for different manufacturing units spread across the globe. For example, the CBT for cement can be 90 percent of the product value. For blast furnace steel, the rate can be around 20 percent of the product price. The average rate will be 20-35 percent of the value of the product. The following table shows the CBT product estimate. Targeted emission reductions The EU aims to achieve 55 percent lower carbon emissions by 2030 compared to 1990 levels. It wants to be carbon neutral by 2050. In 2005, it created the Emissions Trading System (EU-ETS) to achieve its climate goals. The EU-ETS monitors emissions from more than 10,000 power plants, oil refineries, iron, steel, aluminum, cement, paper and glass plants and civil aviation. The ETS system works through European emission allowances (EUAs). Let's call it a license or permit that allows one metric ton of CO2 emissions for a certain period of time. The EU-ETS sets an upper limit on the amount of greenhouse gas emissions (mainly carbon dioxide) that each installation can emit. Each participating company will receive a limited number of annual EUA quotas. At the end of each compliance cycle, all EU-ETS participants must surrender enough EUA allowances to cover all their emissions in that cycle. The EU-ETS system lowers the cap gradually to reduce emissions. Businesses are expected to achieve lower emissions by investing in better technologies, fossil fuel alternatives and energy efficiency. The EU-ETS is thus a cap-and-trade system that uses market forces to reduce emissions. The system allows the market to set a carbon price, and this price drives investment decisions and drives innovation in the market. However, the EU-ETS gave the most polluting industries, such as steel or aluminum, a free ride by granting them free emission allowances to cover all their emissions. This was done to prevent their resettlement to cheaper destinations such as China or India.