The European Union has an Emissions Trading System (ETS) in place. European industries pay a price per ton of CO2 emitted, currently about 25 percent per ton, if they exceed their originally granted emissions allowances. The current scheme has been criticised for setting the carbon price too low for it to be an effective regulatory mechanism and for giving free emissions allowances to some energy-intensive industries. The EU industry and many politicians understandably argue that unilaterally raising the carbon price would weaken the industry’s competitiveness as foreign companies don’t have to pay for emitting CO2, which makes their products comparatively cheaper. They argue that higher prices will lead to production being transferred to other countries with laxer emissions regulations and where production is less energy-efficient, leading overall to an increase in total emissions, thus to carbon leakage.
To address these concerns, the Commission proposes the introduction of a carbon border tax. A carbon border tax would be levied at the EU border for goods imported from third countries to make up for the difference between the domestic carbon tax and those levied in countries with lower (or no) carbon taxes. It is therefore also often referred to as a border carbon adjustment (BCA) as adjustments on the price of imports are made so that they pay the same carbon price as domestic products. It is thus a measure aimed at creating a level playing field for EU companies to compete with international rivals as the bloc unilaterally pursues more ambitious climate change targets.
Continued in Part II.