What just happened?
The EU is ramping up preparations to legislate for a new ‘carbon border tax’, whereby CO2 emissions from imports will be charged at the same rate as those generated within the EU.[1] The idea is not a new one but has been considered too difficult to implement on the ground.
What does this mean?
By slapping taxes on carbon emissions produced at source, the EU aims to hit environmental targets whilst creating a level playing field within and outside of the bloc.
First, climate change. If the EU wishes to become carbon-neutral by 2050, then it must address the issue of ‘carbon leakage’ - the offshoring of polluting production facilities to areas with less stringent legislation. [2] This practice simply shifts the pollution problem elsewhere.
The second ambition of the carbon border tax, or ‘Carbon Border Adjustment Mechanism’ (CBAM), to give it its official title, is more controversial. For years, EU manufacturers in heavy industry have complained about cheap imports from countries with less strict pollution laws flooding European markets. In other words, the EU’s carbon border tax looks to increase the competitiveness of energy-intensive companies within the bloc.
However, an overzealous or poorly planned tax could act as a barrier to economic growth in countries that rely on exports of products derived from heavy industry or could even spark a trade war.[3] China, which would stand to lose out from any CBAM, has been quick to accuse the EU of ‘unilateralism and protectionism’ in its initial proposal.[4]
What does it mean for the legal sector?
Legislating for an effective CBAM is more than a question of political will. After all, former French President Jacques Chirac first proposed a carbon border tax as early as 2007.[5] The difficulty has been working out how it should be implemented.
To simplify matters slightly, there are three pistes the EU could take: a carbon tax on imports, a customs duty on imports, and an extension of the EU’s Emissions Trade Scheme (ETS) to countries outside the bloc.[6]
Whilst all three options pose complex logistical and legal problems, the third way - extending the ETS - is the most relevant for our purposes since it is likely to be the most popular choice.
Since 2005, all EU manufacturers have had to comply with the ETS, a carbon trading scheme that sets a cap on total CO2 emissions and allows companies within the bloc to buy or sell their allowances. With this infrastructure already in place, extending this scheme appears on the surface to be the simplest option.
Delve a little deeper, however, and the picture becomes less clear. As it stands, the EU helps the heavy industry by offering carbon allowances for free to 80% of manufacturing companies.[7] The point is to reduce carbon leakage by removing incentives for domestic manufacturers to cut costs by moving their production facilities abroad. So, creating a level playing field for carbon emissions could sound the death knell for free allowances, but attempts to fill this void by other protectionist measures such as export rebates could flout WTO rules.[8]
In theory, lawmakers should be able to overcome general WTO restrictions on tariffs since exceptions exist for environmental measures.[9] Nevertheless, legal obstacles might arise should international politics enter into the equation.
In the meantime, commercial lawyers would be wise to prepare clients in heavy industry for all eventualities. Regardless of the pace of change, manufacturers will likely face more and not less pressure to report their carbon footprint in the future, so should begin to monitor more closely their emissions for the sake of their bottom line if not the planet.
Written by Tom Higgins Toon
Assessing Firms:
#Norton Rose Fulbright #Dentons #DLA Piper #Allen & Overy #Cleary Gottlieb #Slaughter and May #Herbert Smith Freehills
References:
[1] Alan Beattie, ‘The carbon tax that Brussels hopes will catch on’, Financial Times (14 January 2021) <https://www.ft.com/content/f157e120-1add-4b26-90e9-98bc7c0b1d2f>
[2] Kerstine Appunn, ‘Emission reduction panacea or recipe for trade war? The EU’s carbon border tax debate, Clean Energy Wire (30 November 2020) <https://www.cleanenergywire.org/factsheets/emission-reduction-panacea-or-recipe-trade-war-eus-carbon-border-tax-debate>
[3] Ibid.
[4] Michelle Cheung, ‘What is a Carbon Border Tax and how fair is it?’, Earth.org (31 July 2020) <https://earth.org/what-is-a-carbon-border-tax/>
[5]Claire Stam and Louise Rozès Moscovenko, ‘EU carbon border tax: How a French idea ended up in the limelight’, Euractiv (14 September 2020) <https://www.euractiv.com/section/energy/news/eu-carbon-border-tax-how-a-french-idea-ended-up-in-the-limelight/>
[6] Sebastian Rilling, ‘ICIS EU Carbon: Carbon Border Adjustment Mechanism - possible implementations and EUA market implications’, ICIS (15 December 2020) <https://www.icis.com/explore/resources/news/2020/12/15/10585694/icis-eu-carbon-carbon-border-adjustment-mechanism-possible-implementations-and-eua-market-implications>
[7]EU Commission, ‘Free Allocation’ <https://ec.europa.eu/clima/policies/ets/allowances_en>
[8] Rilling, ‘ICIS EU Carbon’, ICIS (15 December 2020)
[9] Ibid.
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.