Getting the Best out of EU Carbon Tax

After a long period of anticipation, a draft of the EU’s carbon border tariff has been released. To avoid becoming embroiled in trade disputes, the EU avoids using the phrase “tariff,” instead opting for the term “carbon border adjustment mechanism.” Despite the fact that it is a little lengthy, it clearly expresses the policy goal. 

Only roughly one-fifth of the world’s carbon emissions are paid for, according to the World Bank. The remaining 80% can be emitted without incurring any costs to the emitter. 

Carbon emissions are more expensive in the EU than elsewhere, and the EU has promoted carbon neutrality more aggressively than any other country. 

The EU is using the carbon border adjustment mechanism as a complementary measure to implementing carbon neutrality to avoid the migration of high carbon emission industries to other countries, or “unfair competition” as a result of products being sold to the EU by businesses in other countries where they do not have to bear the costs of carbon reductions. 

Cement, energy, fertilizers, steel, and aluminum are among the first group of high-carbon-emitting commodities named by the EU. The list might be expanded to include petrochemical goods, as well as glass and paper manufacture. Carbon border adjustment is required for these commodities’ exports to the EU, which means carbon credits must be obtained on the EU’s carbon trading market to satisfy customs procedures. 

To begin with, the EU assumes that items imported into the bloc are made using low-carbon procedures, typically the poorest 10% of identical products made in the EU. It then calculates how many carbon emission credits would have to be purchased if these products were created in the EU, based on the number and type of goods. 

To offset carbon emissions and complete the customs declaration process, these credits must be purchased. That means the amount to be paid will be determined by the current carbon market price. 

If an importer is unhappy with the EU’s default value, he or she must present a carbon emission certificate for the products produced by an EU-approved certification business. After the actual emissions have been validated, the company completes the customs declaration process by calculating and purchasing the amount of credits that would be required if the items had been manufactured in the EU. 

If a company’s carbon emissions performance is so good that it doesn’t need to purchase any credits, it is effectively exempt. 

Another option to lessen the cost is to show that the carbon price for the items was already paid during the manufacturing process in the nation of origin and that no tax rebate was requested during export. 

Because the cost of emissions would have been paid in Taiwan if Taiwan implemented carbon pricing, the EU would offer significant compensation. The particular amount of compensation would be negotiated further between the two parties. Because the EU has stated that this is not a tax, it will not impose additional taxes. 

The EU’s carbon border tax provides Taiwan with a strong opportunity to introduce carbon pricing. There are additional disadvantages to implementing carbon trading since Taiwan’s key sources of emissions are overly concentrated. 

If a suitable carbon tax is enacted, the cash generated can be used to fund government infrastructure projects. 

Furthermore, the EU would refund the corporation for carbon taxes paid at the point of origin when dealing with the carbon border charge. This is an excellent opportunity to transform adversity into opportunity. 

Photo Credit: https://startupwonders.com/an-eu-carbon-border-tax-could-be-the-next-disruptive-force-in-global-trade/