The European Union (EU) announced earlier this year a proposal to impose a carbon tariff on imports of certain carbon-intensive goods. The tariff, known as the carbon border adjustment mechanism (CBAM), would apply to imports of electricity, aluminum, cement, fertilizers, iron, and steel. The EU has set a target of reducing greenhouse gas emissions by 55 percent in 2030 compared to 1990 levels. To do so, it established a cap-and-trade system for pricing emissions but provided subsidies and free permits to carbon-intensive industries, like the ones above, for fear of competition from imports. The subsidies will phase out in 2026, but the EU doesn’t want its industries and emission goals to be undermined by imports from other countries where carbon is not priced. Thus, the argument for the CBAM.
Many bureaucratic hurdles need to be overcome before the proposal becomes law. The EU must also overcome the opposition of China, Russia, and the U.S. to the idea. It is rumored Canada and Japan are also considering similar mechanisms. And the idea has been floated in the U.S. as well. EU imports of agricultural commodities are not included in the proposal. However, with the growing concerns with climate change and agriculture’s role in climate change, that might change. It’s certainly an issue to monitor.