Why is it needed?
The need for a carbon border tax arises from the European Union’s target to reduce carbon emissions by at least 55 per cent by 2030 compared to 1990 levels. While progress has been made, with emissions already falling by 24 per cent, there is a concerning trend of increasing emissions from imported goods, which currently contribute to 20 per cent of the EU’s CO2 emissions.
The primary objective of the CBAM is to prevent carbon leakage, which occurs when companies relocate their production to countries with less stringent climate policies to avoid the costs associated with carbon emissions. The mechanism aims to achieve this by imposing a tax, the Carbon Border Tax (CBT), on imported goods that emit greenhouse gases. By increasing the cost of importing such goods, the CBAM incentivises companies to produce them within the EU instead, promoting sustainable production practices.
Furthermore, it aims to level the playing field for EU businesses, which are already subject to the EU Emissions Trading System (ETS) which is a cap-and-trade system that sets limits on the total amount of greenhouse gases that businesses in the EU can emit. Companies exceeding their emission limits must purchase allowances from companies that have emitted less. The CBAM will impose a similar cost on imported goods, ensuring that EU businesses are not at a competitive disadvantage.
Another important aspect is its potential to reduce emissions. By making the importation of greenhouse gas-emitting goods more expensive, the CBAM encourages businesses to adopt more sustainable production methods within the EU. This, in turn, can lead to a reduction in emissions associated with the production of these goods.
How will it work?
The EU border tax will be implemented gradually over a period of four years, commencing in October 2023. Initially, it will apply to a limited range of goods, including iron and steel, cement, aluminium, and electricity. However, the coverage of goods subject to the CBAM will be expanded progressively.
Importers of goods falling under the CBAM will be required to provide a declaration regarding the amount of greenhouse gases (GHGs) emitted during the production of those goods.
The European Commission will then calculate the CBAM payment based on the weekly average auction price of EU ETS allowances, which is expressed in euros per metric ton of CO2 emitted.
Importers will need to surrender a corresponding number of CBAM certificates as proof of payment.
Finally, the revenue generated from the CBAM will be utilised to support the climate objectives of the European Union.
This approach aims to ensure that imported goods are subject to a cost that reflects their associated carbon emissions, similar to the cost borne by EU businesses under the EU ETS. By implementing this mechanism, the EU intends to incentivise imported goods to adhere to the same climate standards as those applied within the EU.
Why is it worrying textile and garment exporters?
The EU’s CBAM is set to create significant repercussions for textile and garment exporters. Under the CBAM, imported goods in the sector that emit greenhouse gases (GHGs) during production will be subjected to a tax. As a result, selling textile and garment products in the EU will become more expensive for exporters, who will be responsible for paying the tax on the associated carbon emissions.
The impact of the CBAM on textile and garment exporters, however, will depend on various factors, including the carbon intensity of their production, compliance costs, and alternative market options. Nevertheless, it is expected that the CBAM will result in higher prices for these products in the EU, potentially leading to reduced demand and subsequent job losses in exporting countries.
One of the primary concerns of textile and garment exporters is the increased cost burden the carbon border tax will impose on their products in the EU market. As the tax applies to goods imported into the EU, which often involve energy-intensive processes, it could hinder the competitiveness of these exporters compared to the European businesses.
Another worry for textile and garment exporters is the potential impact on their supply chains. Many products in this industry are manufactured in countries with less stringent climate regulations, leading to higher emissions during production. The carbon border tax could make it more costly for exporters to source products from these countries, further complicating supply chain dynamics.
Job losses in the textile and garment industry is another significant concern. Given that the industry is a major employer in many countries, the carbon border tax could prompt businesses to relocate to countries with lower production costs, impacting the economies of exporting nations.
In response to these concerns, the textile and garment industry is urging the EU to reconsider the carbon border tax, citing its perceived unfairness and detrimental impact on both the industry and economies. The industry has also called for EU support in emission reduction efforts.
Additionally, textile and garment exporters from developing economies fear that the carbon border tax could be utilised as a protectionist measure by the EU, making it even harder for them to compete with European businesses, despite their ongoing emission reduction measures.
While the EU is considering the concerns of the textile and garment industry, it remains committed to addressing climate change. Therefore, the implementation of the carbon border tax is likely to continue, albeit with potential support measures to aid the industry in reducing emissions.
On the other hand, given the complexity and potential implications of the CBAM, it is crucial for textile and garment exporters to comprehend its effects and take proactive steps to mitigate the tax’s impact. This could involve investing in more efficient production methods, transitioning to renewable energy sources, or diversifying export markets.
The way ahead
The future of the CBAM is characterised by potential benefits and challenges. On the positive side, the CBAM can effectively increase the cost of carbon-intensive imports, leading to a reduction in carbon emissions. It also has the potential to level the playing field between companies subject to carbon pricing and those that are not, while promoting the development of clean energy technologies.
However, the CBAM also presents challenges that need to be addressed. Its implementation could prove complex and challenging, and there is a risk of it being perceived as discriminatory or resulting in carbon leakage. Additionally, some businesses and consumers may oppose the CBAM due to the potential impact on prices and trade.
Considering the complex nature of the CBAM, its future direction will depend on several factors. Countries outside the EU can prepare for its impact by gaining a comprehensive understanding of the policy, assessing their exposure to it, and developing mitigation plans. This may involve adopting their own carbon pricing systems, investing in clean energy technologies to reduce emissions, or engaging in trade negotiations with the EU to address concerns related to carbon leakage.
By proactively addressing the challenges and opportunities presented by the CBAM, countries can position themselves better to navigate its impact and potentially minimise any negative consequences on their economies.
The EU’s Carbon Border Adjustment Mechanism (CBAM) proposes taxing high-emissions imports, aiming to prevent carbon leakage, reduce emissions. Textile exporters worry about costs, supply chains, and job losses. While CBAM has benefits, its complexity and trade concerns need addressing, and non-EU countries must prepare to mitigate its impact.