Explainer: The E.U. and U.S. proposed ‘border carbon tax’ policies

Factories could face increased costs of their products at the border as a result

Nova Scotia paper mill. (Pxfuel)

Polluting companies abroad may have their goods subject to border taxes. (Pxfuel)

In the midst of the climate emergency last month, the European Union and the United States proposed carbon taxes with the goal to reduce greenhouse gas emissions and prevent businesses from moving to countries with fewer regulation laws.

On July 14, the European Commission, the E.U. executive body, released a 291-page document consisting of a dozen draft climate policies to meet zero emissions by 2050. The commission is looking to introduce an “environmental tax” on carbon-impacted products such as aluminum, steel, cement, iron, fertilizers, and electricity. 

This regulation attempts to force E.U. businesses to pay a carbon adjustment for importing products outside of the area and avoid leakage. 

Leakage is when “the price on carbon gets high enough that it stops incentivizing producers to reduce their CO2 emissions and starts to encourage them to pack up and move their business to a country with lower carbon taxes,” said Aaron Cosbey, senior associate at the International Institute for Sustainable Development to The Tyee. 

If the U.S. or a country in Europe implemented a carbon border policy to reduce emissions in the area, carbon product factories such as aluminum and steel risk having increased costs to their product when reaching the border. 

The factories that have the tax would lose an advantage over other competitors who have less eco-friendly guidelines. If production started to increase at these companies, critics argue it would weaken the carbon policy and would release the same amount or more carbon dioxide somewhere else. 

According to the Centre for European Reform website, the countries in the E.U. that would be affected are Russia, Turkey, China, Britain, and Ukraine due to their high production levels of iron and steel. 

The commission has also proposed stricter emission limits on cars ending gasoline and diesel vehicle sales by 2035, fast renovations to buildings that aren’t considered energy efficient, and a new target of reducing greenhouse gas emissions by at least 55 per cent for 2030 compared to 1990 levels. 

If the proposal were to come into place, large polluters who currently have permits for every ton of carbon dioxide they release in the air would pay more in the goal for the company to cut emissions. Now the price of the permits is almost $60 per ton

The border tax in the E.U. would not take effect until 2026 due to the negotiation process. European officials are planning to do a phase-in period for the tax to see what aspects work well and give time for countries to prepare efficiently. 

As for the U.S. a week later, they proposed their border tax with a $3.5 trillion budget plan, including addressing climate change, transportation, and other initiatives. If the proposal is accepted, the tax will start in 2024 and apply to around 12 per cent of imports coming into the country, such as petroleum, natural gas, coal, aluminum, steel, iron, and cement. 

With the United States developing a carbon border tax, it could potentially affect Canada’s trading relationship in the future. Since the U.S. is Canada’s largest trading partner the country would most likely respond negatively if Canada introduced a similar proposal, said Cosbey. 

“It won’t be a program that could synchronize with Canada’s current regulations — meaning the two countries couldn’t create a single harmonized border carbon adjustment system,” he said. 

The E.U. proposal still has to be negotiated with 27 other member countries and the European Parliament before becoming legislation. In the U.S., the Democrats hope to pass the $3.5 trillion budget plan by the end of this year.