EU trading partners accuse bloc of protectionism over carbon tax plan

EU trading partners have criticized the bloc’s plan to introduce the world’s first border tax on carbon, saying it is protectionist and puts export industries at risk, as negotiations to complete the deal drag on until the end of week.

According to two people familiar with the discussions, several developing nations have already begun negotiations with Brussels for more flexibility in the proposals, including possible waivers.

The plan is tentative until a final set of talks conclude this weekend. After that, the agreement must be approved by the EU ambassadors. Pending items include specific dates for their phase-in.

German lawmaker Michael Bloss, a negotiator for the European Parliament, said on Saturday that “a lot was negotiated” on Friday but “little was decided.” Talks “will continue and hopefully conclude negotiations on Europe’s largest climate protection package,” he told Reuters.

Swedish lawmaker Emma Wiesner said Friday’s talks had made a “surprisingly large amount of progress.” Other EU officials told Reuters no agreement had yet been found on the most divisive issues.

The tax will force importers to buy certificates to cover their emissions based on calculations linked to the EU’s own carbon price. The agreement will cover iron, steel, cement, aluminum, fertilizers, hydrogen and electricity generation. A trial period is scheduled to begin in October 2023.

If deemed a success, the EU plans to expand the scheme to other sectors, including cars and organic chemicals.

The plan has drawn criticism from countries including the US and South Africa, which said the Carbon Border Adjustment Mechanism (CBAM) will unfairly penalize their manufacturers.

“We are particularly concerned about things like border adjustment taxes and regulatory requirements that are imposed unilaterally,” Ebrahim Patel, South Africa’s trade minister, told the Financial Times. “If it becomes a huge defining element between north and south, there will be a lot of political resistance.”

“There are a lot of concerns on our side about how this will affect us and our business relationship,” US Trade Representative Katherine Tai said at a conference in Washington this week.

The EU sees the CBAM as a central part of its efforts to reach net zero emissions by 2050, arguing that it will simultaneously encourage countries outside the bloc to decarbonise their industrial sectors.

“CBAM is just a way to threaten third countries to upgrade their climate ambitions as well,” said Mohammed Chahim, a Dutch socialist politician who led negotiations on the law for the European parliament.

Before Russia invasion of ukraine, was destined to be the country most affected by the CBAM. Russian exports made up the largest share of imports from sectors affected by CBAM, according to a analysis by Berlin-based think tank Adelphi based on EU import data between 2015 and 2019.

The substantial drop in imports from Russia due to the EU sanctions regime and the destruction of the Ukrainian industry has shifted the burden to other countries.

China accounts for about a tenth of affected imports, according to Adelphi, with Turkey and India also affected. China has frequently attacked the tariff since it was first proposed in July last year.

Developing nations with less economic weight and without established systems to measure emissions were more likely to suffer from the introduction of the tax, said Faten Aggad, senior adviser on climate diplomacy at the African Climate Foundation.

“The countries that are most likely to mitigate CBAM risk are the ones that already have adequate carbon counts,” he said. The result could be “de-industrialisation” in African nations that export to the EU.

“Many of these sectors are at risk of losing business unless we pump money into their sustainability and it is very difficult to rebuild them.”

Brazilian steelmakers are concerned that the CBAM will endanger domestic producers. Rather than ship their products to Europe, exporters could target less protected steel markets such as South America.

“Our great concern is not exports to [Europe]”, said Marco Polo de Mello Lopes, executive president of the Aço Brasil Institute, but more material is diverted to the region, leaving the national industry “vulnerable”.

Anger over the move has been exacerbated by the EU’s insistence that the CBAM will encourage others to decarbonise, without providing funds to help poorer countries invest in clean technologies.

CBAM revenues are earmarked for the EU’s internal budget with a flexible commitment to provide climate finance to countries outside the bloc, according to those familiar with the draft text.

Baran Bozoğlu, president of the Association for Climate Change Research and Policy, a nonprofit research team in Ankara, said it would be “beneficial [for the EU] provide various incentives, supports and technologies so that the Turkish economy is not negatively affected.”

He added that exporters would have to pay to calculate their carbon emissions and validate them for reporting to the EU. It was a “great injustice” that they had to cover that cost in addition to paying the CBAM, he said.

Additional reporting from Reuters, Andy Bounds in Brussels, David Pilling in London and Michael Pooler in São Paulo

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