Yves here. While many are focused on the news from Venezuela, significant geo-economic tensions are still unfolding elsewhere. Notably, Trump has once again threatened to impose additional tariffs on India for its continued purchases of Russian oil. However, another vital development receiving less attention is the EU’s carbon border tax. This tax introduces fees on specific high-carbon-content imports, such as cement and steel, based on the estimated fossil fuel usage during their production compared to EU counterparts. Its intention is to protect and encourage European manufacturers that adhere to these stricter environmental regulations. Moreover, one could argue that it counteracts historical colonial practices that exploited poorer nations for cheap goods, making it a positive step from an environmental standpoint.
This article does not delve deeply into the specifics of how these levies are calculated but highlights a controversy surrounding Chinese steel, where European manufacturers believe the tax has been set too low. As with many economic incentives and disincentives, the carbon border adjustment mechanism seems promising in theory. Its success, however, will greatly depend on the particulars of its design and implementation.
By Irina Slav, a writer for Oilprice.com with extensive experience in the oil and gas sector. Originally published at OilPrice
- The EU’s carbon border adjustment mechanism, launched on January 1, aims to create a level playing field for European steel, cement, and energy producers by taxing the carbon content of imports from countries with weaker emissions regulations.
- China has threatened retaliatory measures, labeling CBAM as unfair and discriminatory.
- While CBAM may protect EU industries, it poses the risk of higher consumer prices and escalating trade tensions with major exporting nations.
On January 1st, the EU carbon border adjustment mechanism came into effect with the aim of enhancing the competitiveness of European manufacturers against non-EU firms operating under looser emissions regulations. Unsurprisingly, China was the first to voice its discontent, and it certainly won’t be the last.
The carbon border adjustment mechanism, often referred to as CBAM, was designed to address the unintended consequences of having the world’s strictest emission reduction standards for industries, which can lead to prohibitively high costs making European products uncompetitive. This challenge is especially acute for manufacturers of steel and cement, where China’s lack of stringent emissions regulations allows it to offer much cheaper alternatives that customers prefer.
In essence, the European Union has implemented the CBAM to ensure that cheaper imported steel, cement, and electricity come with a higher cost, thereby enhancing the competitiveness of European manufacturers. However, this has displeased China and India, who now have the means to retaliate, likely making life more complicated for European businesses.
Immediately following the introduction of CBAM, China’s Ministry of Commerce issued a statement condemning the legislation as “unfair” and “discriminatory,” warning that they would take all necessary measures in response to perceived trade restrictions, as reported by Bloomberg reported.
According to a consultant specializing in carbon permit markets, “CBAM is quite unpopular among major exporters to the EU, but it has already proven to effectively encourage reluctant countries to develop or expand carbon pricing initiatives.” This indicates a significant policy shift aimed at fortifying EU industries while simultaneously promoting the concept of carbon pricing to other nations.
While China does have its own carbon market, established since 2021 and covering the largest volume of emissions globally, the challenge is ultimately about maintaining competitiveness. China does not appreciate the threat posed to its industrial advantage by this new mechanism.
In straightforward terms, the carbon border adjustment mechanism places a price on carbon dioxide emissions produced during the manufacturing of goods like steel and cement. This price is determined based on assessments of emissions for relevant industries in exporting countries. A default emission value is set for the production of specific goods, alongside emission benchmarks that are intended to work together, though the applications remain somewhat ambiguous. Some observers believe this aspect may inadvertently favor China.
Politico reported last year that industry executives expressed concerns that the default emission values for specific exporting countries were underestimated, including some steel produced in China, which was considered to have lower emissions than European production.
An industry representative remarked, “Discrepancies in default values and benchmarks would dilute the incentive for cleaner production techniques and allow high-emission imports to flood the EU market without adequate carbon costs.” This could potentially make CBAM less effective and, in some cases, counterproductive.
Meanwhile, Indian steel imports are likely to diminish, as Indian producers seem to have avoided the inconsistencies previously mentioned. As the second-largest steel producer in the world—after China—India currently exports up to 66% of its output to the EU.
However, this is set to decline sharply next year, as India’s steel manufacturing utilizes coal-fueled blast furnaces, which do not align with the EU’s emission reduction goals. Reuters notes that Indian steel mills might transition to electric arc furnaces, which have a smaller emissions footprint, but such a transformation requires significant time and investment.
“Most companies are still figuring out how to navigate CBAM,” an analyst told Reuters. “In the short term, it is expected to slow down India’s exports to the EU,” stated Ravi Sodah from Elara Capital.
As two of the world’s largest industrial exporters and significant suppliers to the EU, both China and India appear poised to respond to CBAM by, at least in India’s case, cutting back on exports. While this may provide European producers with a clearer market, it will not be welcome news for consumers, who will bear the financial burden of what amounts to a form of market intervention by the EU—a notably protectionist maneuver. The United States is also likely to express its dissatisfaction with this development soon.
