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As of: 09/20/2021 1:47 p.m.
The EU Commission wants to offset the competitive disadvantages of European companies that reduce emissions – with the so-called CO2 border adjustment. But such climate tariffs are controversial.
The CO2 border adjustment is part of the “Fit for 55” climate package proposed by the EU Commission in mid-July. The aim of the package is to reduce greenhouse gas emissions in the EU by 55 percent by 2030 compared to 1990 levels. The border adjustment, also known as the “climate tariff”, is intended to prevent production from being relocated to countries that pursue a less restrictive climate policy.
“One would actually need a uniform CO2 price worldwide that taxes production. The problem is, however, that some countries have no pricing at all and others have their own regulations,” explains tax expert Volker Meier from the Ifo Institute. Since the EU Commission is also proposing stricter rules for emissions trading with the Fit for 55 climate package, the border adjustment is intended to protect the location in return and ensure that domestic companies do not have any competitive disadvantages.
Relocation of production should be avoided
Because this works like a customs duty, whereby the tax is based on how high the energy consumption was in the manufacture of a product. This is to ensure that producers outside the EU also have to pay as much for climate protection as domestic companies for imports into the internal market.
However, it is unclear whether this will really succeed in protecting the economy in Europe, explains Ifo expert Meier: “Although it is possible that the site is protected to a certain extent, it can also lead to an increased incentive to relocate production come abroad. ” Because it is not yet certain how the CO2 border adjustment will ultimately be calculated and how production chains will be dealt with in which intermediate products are manufactured in several countries.
“There will probably be product-specific tariffs, as it would be very time-consuming to determine the CO2 content of every production in the individual countries,” said Meier. The EU Commission is currently planning the compensation system as a reflection of the certificate trade within the EU, which should ensure the same pricing for domestic and foreign producers.
New trade conflicts could threaten
At the same time, this mechanism naturally has an impact on international relations: “The introduction of climate tariffs by the EU will not necessarily induce other countries to do more climate protection and could also provoke countermeasures,” fears Karsten Neuhoff, head of the climate policy department at the German Institute for Economic Research (DIW). The tariffs will be perceived as protectionist.
So far, there are plans to tax cement, fertilizer, iron, steel, aluminum and electricity generation. China, Russia and Turkey in particular would be affected by the levy, as they export large quantities to the EU.
Economists make further suggestions
A comparable system in which electricity imports are priced already exists in California. Similar approaches for a climate tariff are currently being discussed for the whole of the USA, Japan and Canada. But even there, the practical implementation is still unclear.
A kind of climate club would also be conceivable in the transatlantic cooperation, in which the USA and Europe join forces with similar CO2 prices and there is a mutual compensation towards third countries. “If there is no such climate club, then countries with a system similar to that of the USA will probably be exempted from taxation,” says Ifo tax expert Meier. Then companies would have already paid for CO2 emissions in their own country. So far, members of the European Economic Area and Switzerland are explicitly excluded.
At the same time, economists and the European Commission are also discussing other approaches, such as a climate contribution, according to DIW expert Neuhoff. Importers paid a fixed value for the production of one tonne of steel, for example, regardless of whether it was produced domestically or abroad: “This does not create any incentives for other countries, but it does create effective framework conditions for the transition to climate neutrality in European industry without creating incentives to relocate production and emissions. “
Consumers will pay higher prices
How the measure is implemented now depends on the EU Parliament and the member states. You need to review the proposals and adopt them. This can take months as both parliament and member states have to agree. The Commission is currently planning that importers into the EU should pay the compensation from 2026, and from 2023 there will be a transitional reporting system for cement, fertilizer, iron, steel, aluminum and electricity generation.
When it comes to the consequences for consumers within the EU, the economists at the Ifo Institute and DIW agree: No matter which form of pricing is chosen, the higher prices will probably be passed on to consumers.