Companies around the world that export to the European Union—the world’s largest single market—are now on notice. After years of discussion and debate, the European Commission in late July unveiled its long-anticipated plans to make importers and non-EU manufacturers pay for the carbon emissions associated with the goods and materials they sell in the EU.
The carbon border tax has arrived. And the ramifications will be felt strongly both by companies outside the EU and by those within the bloc that buy or make industrial products.
The concept of “carbon pricing”—levying a charge for each metric ton of carbon dioxide emitted by industry—is well embedded in many countries’ climate and sustainability policies. But the EU’s carbon border adjustment mechanism, better known as a carbon border tax, is the first time pricing will apply equally to imports. As a result, the impact will reverberate through global value chains and could redefine the competitive balance between nations in many industries. It will also provide a renewed impetus for producers around the world to accelerate efforts to slash their carbon footprints.
When the tax is fully implemented in January 2026, the biggest initial impact will be on the cost of such high-carbon inputs as steel, cement, aluminum, chemicals, and electricity; EU importers and non-EU producers of these inputs will be required to pay an estimated €75 per metric ton of CO2 emissions. This could increase the cost of materials made by more carbon-intensive producers, such as China, Russia, and India, by 15% to 30% overnight. And the effect will increase during subsequent years: the tax rate is projected to approach €100 per metric ton by 2030, and more products will likely fall within its scope at that point.
Although many details must still be ironed out over the next year, industry stakeholders need to act now because the bloc’s intent is clear. Companies have to measure their current emissions and carbon tax exposure across their supply chains and product lines, develop a resilient carbon strategy playbook, and identify opportunities to turn the climate challenge into a source of competitive advantage. And they should engage with EU decision makers to help shape the future of climate policy.
HOW THE CARBON BORDER TAX WILL WORK
The carbon border tax is an integral part of a broader reset of the EU’s climate change policy, which was unveiled at the same time. To meet its ambitious climate targets for 2030, and achieve net-zero emissions by 2050, the EU must ramp up its efforts across manufacturing industries, buildings, and the transportation sector. For the bloc to meet these goals, it will need to rely heavily on market-based measures—such as carbon pricing—aimed at making it less expensive for companies to invest in decarbonizing technologies than to continue emitting carbon.
Many EU manufacturers have been paying for their carbon emissions since 2005 through the Emissions Trading System (ETS), which places annual caps on emissions and creates a carbon market for trading of emissions permits. This market then sets the carbon price, which is currently just over €60 per metric ton. The higher the carbon price rises, however, the more EU producers are put at risk of “carbon leakage”—losing out to cheaper imports from countries with less strict climate regulation. EU manufacturers have been receiving free carbon permits to compensate for carbon leakage. But these will now be phased out. Instead, the carbon border tax will be used to address this problem by reducing the attractiveness of offshoring as a means of avoiding EU climate costs.