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'Fit for 55' - the EU's Climate Ambitions and the Proposed Border Tax Adjustment

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The European Union is preparing the world’s most ambitious climate goal: to reduce emissions by about 55 percent over the next decade and to become the world’s first carbon neutral economy by 2050.  Climate policy will again take center stage in Europe in 2021.  The European Commission is expected to table a mammoth package of green laws by July 14, in time for the COP26 UN climate summit in Glasgow, Scotland, in November. 

The new European Climate Law has been adopted at the end of June, but is just a start of a massive program of legislative reform.  ‘Fit for 55’ is the Commission’s nickname for this massive package of 12 pieces of  EU legislation which aims to conform European laws to the bloc’s new climate objective for 2030.  Almost all EU laws on energy and climate are likely to be revised as part of the package, ranging from the renewable energy directive to EU legislation affecting energy taxation and the crown jewel of EU climate policy – the Emissions Trading Scheme (ETS), which regulates the world’s biggest carbon market.

The ‘Fit for 55’ package will include a brand new addition to the EU’s climate policy arsenal: the much-awaited carbon border adjustment (CBA) mechanism , which aims to re-establish a level playing field between European industries and manufacturers with those in other parts of the world which do not face the same carbon costs. The carbon border adjustment mechanism aims to put a price on imports from countries where it is cheaper to pollute, as a way of protecting European manufacturers facing higher carbon costs.

The Commission has promised that any new carbon-pricing mechanism will simultaneously level the playing field for European and foreign producers in carbon-intensive sectors and respect the EU’s commitments under international trade law. The CBA mechanism would reflect the amount of carbon emissions attributed to goods imported into the 27-nation region.  Producers in countries with carbon-pricing mechanisms that the EU recognizes as compatible with its own may be exempt.

Although the exact mechanics and timing of a carbon border tax must still be determined and be approved by the EU’s legislative bodies, it should be noted that the requirement to measure, report, and factor in the costs of a product’s carbon footprint is already in place in the EU.  It could soon become a requirement for companies that export to Europe as well.
But the proposal has ruffled feathers around the world. Emerging economies such as Brazil, South Africa, India and China, have criticized the plan as “discriminatory” and unfair to developing nations.     

Across the Atlantic, US climate envoy John Kerry warned in March that the EU levy should be envisaged only as a last resort measure, saying: “It does have serious implications for economies, and for relationships, and trade.”1

In May 2021 EU carbon prices rose above Euro 50 per ton for the first time – boosted by the bloc’s new target to slash emissions faster this decade than previously expected, and increased activity in the market from financial investors.

Analysts expect that goal will stoke further price increases, with the Fit for 55 launch on July 14 as this includes further reforms to extend and tighten the reach of the ETS

[1] John Kerry warns EU against carbon border tax, Financial Times, March 11, 2021, https://www.ft.com/content/3d00d3c8-202d-4765-b0ae-e2b212bbca98
 

 

 

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