What Is EU Carbon Border Tax? What Are The Implications On European Companies?

The European Union has initiated discussions on a new policy change that would alter significantly trade and economic relationships between counties. This is the EU Carbon border tax, an initiative which involves taxing businesses for the levels of carbon emissions emitted during production.  The EU employs this to serve as a deterrent to companies using less carbon-efficient materials.

 As related by the EU president, Ursula von der Leyen, the European Commission by this initiative intends to cut down carbon emissions by above fifty percent which is a rate that supersedes previous attempts at carbon emission reduction. This is in line with the new European commission’s dedication to environmental protection; a pursuit listed as its highest priority.

This development has sparked a lot of debates amongst countries and important stakeholders. While some have regarded this as discriminatory against developing countries, others see it as a promising way to cut down on Carbon pollution significantly by reducing the greenhouse effect.

What Is The EU Carbon Border Tax?

During the process of production by companies in the European Union, there is a requirement to procure permits for the carbon emissions generated which can lead to climate warming.

The cost incurred as a result of purchasing these permits increases the price of related products. The EU carbon border tax is a step further at encouraging companies to limit their emissions and watch their carbon footprints.

This policy is unique to European Union and many other companies in different countries do not face the same concerns.  This translates to imports in the European Union being cheaper and compromises the efforts of the union at environmental protection as a result of carbon leakage.

What Sectors Would Be Affected the Most by this Policy?

This new policy has a high impact on industrial sectors who depend on imports into the EU and manufacturers who depend on imported input. The Extent of the impact of the carbon border tax is a function of two major factors; Trade intensity and Carbon intensity.

Based on this, sectors such as quarrying, mining coke, and refined petroleum products would be most affected. This is because these sectors contribute significantly to global warming due to the greenhouse effect they elicit.

Additionally, the products from these sectors are traded to a high degree; the culmination into a high trade intensity and high carbon intensity of these sectors put them at the receiving end of this policy.

Furthermore, Sectors with a high carbon intensity albeit low trading intensity would be affected to a lesser degree. These sectors include chemical products, basic metals, paper products, and nonmetallic minerals. This impact of the carbon border tax might also indirectly extend to sectors such as textile and pharmaceutical who utilized carbon-intensive inputs even if it just comprises a little proportion of the production input.

The companies in these sectors involved are faced with the option of absorbing the tax imposed or redirecting it. The consumers who would have to pay more for certain commodities.

Implications For European Countries

The implication the EU border tax would have for companies in various sectors is multifaceted. For companies who have a large carbon footprint, there is a need for them to re-strategize which can be a little daunting. For other companies with low carbon footprint, and have hitherto been inclined to eco-friendliness it’s an opportunity to seize the competitive advantage

Currently, a program known as the Emissions Trading System covers most industries in the European Union. This program charges as high as $60 per ton of carbon dioxide and thus gives European countries a great incentive to reduce emissions.

This new policy which further seeks to tighten and increased these incentives would force many European industries to seek out alternatives that are likely more expensive

Some steel producers are already trying out different ways to replace fossil fuels in their furnaces but have complained about possible replacement being estimated to cost humongous amounts of money.

Companies who have already embraced more environment-friendly production technology, and take care in managing their carbon footprint are at a strategic advantage and will become strong competitors in their sectors.

EU Carbon Border Tax a Competitive Advantage?

The EU carbon border tax is bound to create an upheaval in the competitive advantage scope. Companies would have to source for alternatives that are less carbon-intensive to utilize in production or have to bear the consequences of the additional cost of production which translates to high pricing and place them at the bottom of the competitive market. This policy can also cause an immediate change in global trade

In steel production, countries such as Turkey India produce steel which is more carbon efficient and would thus incur less tax. This puts them ahead of Countries such as China and Ukraine who would have to seek alternative methods or pay significantly higher taxes.

In conclusion, experts have surmised that a carbon border tax is possibly very important for only industries such as textiles mining and petroleum products which utilize carbon-intensive materials and are significant contributors to international trade and the economy at large. Leeway exists for these industries in the carbon pricing policies and a carbon border tax. A carbon border tax would serve as a replacement for these exemptions.

While the discussions are ongoing, as this policy won’t take effect till 2026, Whichever direction the wind sales in this discourse, it is vital to  note that major changes and alterations would arise from this policy therefore Important stakeholders and  companies should gear up to seek out means to stay relevant in the face of this new policy.