After a period of advance notice, a draft of the EU’s carbon border tariff has finally been announced. To avoid being caught up in trade disputes, the EU does not mention the word “tariff,” but instead uses the term “carbon border adjustment mechanism.” Although it is a bit lengthy, it clearly states the policy objective.
According to the World Bank, only about one-fifth of the world’s carbon emissions are being paid for. The remaining 80 percent can be emitted without the emitter having to pay for doing so.
The cost of carbon emissions are higher in the EU than anywhere else, and the EU has also promoted carbon neutrality more vigorously than any country.
To avoid the migration of high carbon emission industries to other countries, or “unfair competition” as a result of products being sold to the EU by businesses in other countries where they do not have to bear the costs of carbon reductions, the EU is using the carbon border adjustment mechanism as a complementary measure to implementing carbon neutrality.
The EU announced the first group of high carbon emission commodities, which include cement, electricity, fertilizers, steel and aluminum. Petrochemical products, and glass and paper manufacturing might be added to the list. Exports of these commodities to the EU must go through carbon border adjustment, that is, carbon credits must be purchased on the EU’s carbon trading market to complete customs procedures.
First, the EU assumes that goods imported into the bloc are produced using processes with poor carbon performance, roughly the worst 10 percent of similar products produced in the EU. It then projects carbon emissions for these commodities based on the number and type of goods, before calculating how many carbon emission credits would have to be purchased if these products were manufactured in the EU.
These credits must then be purchased to offset carbon emissions and complete the customs declaration process. That also means that the amount to be paid would depend on the prevailing carbon market price.
If an importer is dissatisfied with the default value imposed by the EU, a carbon emission certificate for the products issued by a certification company recognized by the EU must be submitted. Once the actual emissions are certified, the company completes the customs declaration process by calculating and purchasing the number of credits that would have to be purchased if the goods were produced in the EU.
If the company’s carbon emissions performance is so good that it does not need to buy any credits, that is in effect equal to an exemption.
Another way to reduce the burden is to provide proof that carbon pricing for the goods has already been paid in the country of production during the production process and that a tax refund was not applied for during export.
If Taiwan were to introduce carbon pricing, the EU would offer considerable compensation, because the cost of emissions would have been paid in Taiwan. The specific level of compensation would be subject to further negotiation between the two sides. As the EU has stressed that this is not a tax, it would not add tax on top of tax.
The EU’s carbon border tariff is a good opportunity for Taiwan to implement carbon pricing. As Taiwan’s major sources of emissions are excessively concentrated, there are more drawbacks to implementing emissions trading.
If a proper carbon tax were implemented, the tax revenue could be kept in the country for the government’s infrastructure projects.
Moreover, when dealing with the carbon border tariff, the EU would compensate the company for carbon taxes paid at the place of origin. This should be an opportunity to turn a crisis into an opportunity.
Honda Chen is an associate research fellow at the Taiwan Academy of Banking and Finance.
Translated by Perry Svensson
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