Europe’s Carbon Border Tax Plan Looms Over Global Trade

PARIS—Europe is preparing legislation that would jolt the rules of international trade by taxing imported goods based on the greenhouse gases emitted to make them, a plan that has sent shudders through the world’s supply chains and unsettled big trading partners such as the U.S., Russia and China.

The European Union plan, due to be announced next month, is generating debate ahead of a summit of the leaders of the Group of Seven rich countries in southwestern England starting Friday, where the international response to climate change is set to be a central topic.

The EU proposal would open up a new front in the fight against climate change by setting the world’s first limits on carbon in traded goods. The 27-nation bloc says it wants to stop polluting industries from shifting production outside Europe to avoid the bloc’s emissions limits and then exporting back into the EU. The proposal would also use the EU’s economic heft to send a powerful signal for other countries to start regulating carbon emissions.

It comes as President Biden and European leaders are aiming to breathe new life into the Paris climate accord, after the Trump administration pulled the U.S. out and some European nations fell off track from their own emissions targets. The West is hoping to convince the developing world to make ambitious new commitments to limit emissions ahead of a November summit in Scotland.

John Kerry,

the Biden administration’s climate envoy, has said carbon-tariff proposals could undermine that process, even as the administration says it is considering whether to support the policy for the U.S.

“Secretary Kerry recognizes that border carbon adjustments are a tool that can, under the right circumstances and if designed properly, be useful in advancing climate action,” a U.S. State Department spokeswoman said.

Developing countries at a climate meeting in April called the carbon border tax a “grave concern,” saying it undermines a key principle of the Paris climate agreement that poorer nations should bear less of the burden for cutting emissions than Europe and other rich countries. Manufacturers in China, India and across the developing world usually rely on coal-fired electricity; that means they would likely face a significant carbon bill on their exports to the EU.

Smoke billows from smokestacks and a coal-fired generator at a steel factory in Hebei, China.


Kevin Frayer/Getty Images

U.S. companies worry the proposal would create a web of new red tape hindering companies’ access to the European market.

The EU proposal would require European importers to buy certificates that would cover the carbon content of their imports in certain sectors, according to a draft of the legislation reviewed by The Wall Street Journal. At first, the rules would apply to four heavily polluting industries: steel, aluminum, cement and fertilizer, the draft says. Other industries would be included over time. The draft says the rules could come into effect during a transitional period starting as early as 2023 and be fully in force in 2025, though officials say those dates could change in the final proposal.

The proposal would establish a new agency to enforce the rules and certify private companies that importers would need to hire to calculate the carbon content of goods produced overseas. Importers of goods covered by the levy—called a carbon border adjustment mechanism—would need to be authorized by the new agency, according to the draft proposal. Officials say the legislation would create a big new market for firms with the expertise to calculate the so-called carbon content of imports.

The European Commission, the EU’s executive arm, is drafting the legislation, which must then be approved by the bloc’s national governments and the European Parliament. The idea already has broad political support across the bloc: EU member states endorsed it at a summit last year and the Parliament did so this year.


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Talk of the new rules is already pushing manufacturers to act, said Tim Figures of the Boston Consulting Group.

“Our clients are seeing this as an additional call to action to look at decarbonizing their supply chains,” Mr. Figures said. “It sits alongside investor and ethical pressure by actually putting a value on the carbon contained in imports.”

In Russia, which would be the economy most affected by the tax, heavy industries have begun to spin off carbon-intensive production into separate companies. Aluminum giant Rusal said last month that it would spin off its higher-polluting smelters into a separate company that would sell largely to the domestic market. Rusal would rename itself AL+ and hold smelters that are powered by low-carbon hydropower in Siberia.

“Rusal’s emissions are among the lowest already, and this reduces the risk of the [border tax] for our company,” said a company spokesman, adding that the split was motivated by the Paris agreement, not the EU proposal.

The draft legislation proposes charging a carbon price based on the EU’s emissions-allowance market, which regulates EU power plants and factories. That price, which would be applied to each ton of carbon dioxide emitted to make an imported good, has soared to more than 50 euros a metric ton of carbon dioxide, equivalent to $56, from around €30 at the beginning of the year, as traders anticipate that the bloc later this year will move to ratchet down emissions caps.

Since taking office, President Biden has pushed to expand the U.S.’s global influence in everything from climate change to defense. WSJ looks at how he could leverage ties with world leaders to help his foreign policy agenda during his first trip overseas. Photo: Phil Noble/Associated Press

EU officials say that applying the same price to carbon dioxide emitted inside and outside the bloc means the system complies with World Trade Organization rules that forbid governments from discriminating against foreign companies.

Importers that source goods from the few countries that already set an explicit price on carbon emissions would be able to deduct those costs from the proposed import tax, according to the draft proposal. That provision could be a problem for manufacturers in the U.S., which hasn’t passed a nationwide carbon pricing system.

“That’s going to make it more challenging to find a way to dock into the EU scheme,” Mr. Figures said.

One risk of the EU approach is that for now the plan won’t apply to products that are higher up the value chain. Aluminum slabs will be taxed but not aluminum cans or car parts. That could lead manufacturers to sidestep the tax by importing finished goods.

For that reason and others, European aluminum producers lobbied the commission for aluminum not to be included in the system, even though the industry’s main competition comes from Chinese producers that make aluminum with coal-fired power, a process that produces massive amounts of carbon dioxide.

“We don’t want to be in, because based on what we know, we don’t think it can work,” said Emanuele Manigrassi, public-affairs manager at European Aluminium, an industry association.

Economists say overseas producers could also game the system by either routing their highly polluting goods to a third country or reserving goods produced in low-carbon factories for the European market, while continuing high-carbon production for customers elsewhere.

“There’s a huge risk that the trade deviations will kick in and make this into an even more complicated monster,” said Georg Zachmann, an economist at Bruegel, a think tank in Brussels. “It’s whack-a-mole.”

Write to Matthew Dalton at [email protected]

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