Carbon border charge to finance EU green growth

Revenues from the forthcoming European Union’s proposed carbon border charge can be used to help finance the bloc’s green transition. But this will never be declared as the charge’s official objective, because the new levy must be created only for environmental reasons, to avoid contravening World Trade Organisation (WTO) rules.

Steps being taken to tighten the trading price of carbon allowances within the European Union’s emissions trading scheme (EU:ETS) are set to increase the current price of between €25 and €30 per tonne. Official forecasts from AEFP, the French equivalent of the CBI, reckon that these will reach a minimum of €40 per tonne by 2030 and above €230 per tonne by 2050.

Because these prices are borne only by European participants, this June the European Commission is set to publish a “carbon border adjustment mechanism.” The goal is to avoid carbon leakage, whereby companies relocate manufacturing abroad to countries where pollution costs are lower.

Two main options are under consideration. These are a border tax, which unless skilfully constructed may contravene WTO rules. Or a notional carbon levy mirroring the EU:ETS. Under this option, a benchmark of carbon consumption is created for a given product corresponding to the EU average. It is then multiplied by the current ETS traded price. Crucially, such an external allowance would not be tradable.

Amongst industrial sectors most likely to be covered initially are those designated as “raw materials”. These include the cement, steel and chemical industries.

For so long as the new UK:ETS has trading prices on a par with the EU:ETS, it is not likely to have much impact on business based in the UK. It is clear though that, should significant divergences in the system take place, then the new arrangements would be imposed on UK-based firms.

Patrick Pouyanne (pictured), CEO of Total, endorses the concept as a “very logical extension of the EU’s carbon price policy. It could be a protective instrument, but also a proactive instrument in terms of reducing carbon emissions in other parts of the world.”

The new mechanism will be part of a wider package of law under the Green New Deal, aimed at cutting the EU’s emissions by 55 per cent below 1990 levels by 2030.