EU climate levy to be linked to prices in red-hot carbon market

The European Union is tightening its environmental rules in an overhaul that will affect all areas from transport to energy production and trade. PHOTO: REUTERS

BRUSSELS (BLOOMBERG) - The European Union's plan to make importers pay for greenhouse gas emissions in certain goods manufactured outside the bloc will link the new levies to the costs domestic producers already face, according to a person familiar with the proposals.

In a move no other country in the world has so far taken in the fight against climate change, the European Commission wants to introduce a mechanism where companies bringing some carbon-intensive goods into the bloc must buy emissions certificates at a price linked to the EU Emissions Trading System (ETS), the person said, asking not to be named commenting on private discussions.

The so-called Carbon Border Adjustment Mechanism is intended to ensure European businesses have a level playing field vis-a-vis their competitors in laxer regimes as the bloc tightens its restrictions on emissions.

The planned measure is part of a broader package to be put forward on July 14, in a bid to align the EU economy with stricter emissions-reduction targets for 2030.

The 27-nation bloc is tightening its environmental rules in an overhaul that will affect all areas from transport to energy production and trade. The overarching goal of the green deal is for Europe to become the world's first climate-neutral continent by the middle of the century.

The commission is considering a transitional period of up to three years before a full entry into force of the mechanism in January 2026, according to a draft proposal.

Between 2023 and 2026 it could use a simplified system "with the objective of reducing the risk of disruptive impacts on trade flows and alleviating the initial administrative burden for declarants", the proposal said.

Europe's plans are already causing diplomatic unease in countries from Ukraine to China and India. The planned levy will be proposed just five months before a crucial climate summit, where coalition-building will be key to ensuring major emitters step up their efforts to reduce emissions.

Under the draft EU regulation, importers in certain sectors, which will include power, will be required to buy electronic emission certificates at prices corresponding to those in the EU ETS, the world's biggest cap-and-trade programme for greenhouse gases. Each Carbon Border Adjustment Mechanism (CBAM) certificate will correspond to one metric tonne of emissions embedded in the imported goods.

The cost of emissions in the EU carbon market has soared tenfold in the past four years as the bloc bolstered the programme and vowed to step up climate action. Benchmark permits to pollute jumped to an all-time high of €56.90 (S$92) on May 14 and ended the day at €51.40 on Wednesday (June 2).

The price of CBAM certificates will be calculated as the average of the closing prices of all government auctions of carbon permits during each calendar week, according to the draft proposal.

By the end of May each year, importers will need to submit a declaration stating the emissions embedded in goods they brought in during the previous calendar year. It will also have to contain the number of CBAM certificates that the importer surrendered.

"In case the actual emissions cannot be adequately verified, including cases where the authorised declarant has failed to submit the necessary information, the number of CBAM certificates to be surrendered shall be determined in accordance with default values," the commission said in the draft, which may still change before publication.

If the embedded emissions originate in a country that has carbon pricing, the importer would be entitled to claim a reduction in the number of CBAM certificates to be surrendered. Such an application would have to be in line with a special carbon price certification system that the commission will design separately.

Importers will face a penalty for failure to comply with the regulation, according to the draft. They will have to pay three times the average price of CBAM certificates in the previous year for each certificate that was not surrendered.

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