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At the start of this year, the European Union officially launched the world’s first tariff on the carbon footprints of imports. It’s already looking to carve out a loophole.
The EU’s carbon border adjustment mechanism, or CBAM, requires importers to pay a fee based on the carbon dioxide emissions of the goods they bring in.
It’s a major global policy experiment — one that will have plenty of opportunities to prove itself as the EU busily expands its trade deals. In January, European Commission President Ursula von der Leyen inked a sweeping free-trade deal with the South American bloc known as Mercosur, putting an end to 25 years of negotiations. The following week, she announced a landmark pact with India, which included pledges to ramp up purchases of steel, pharmaceuticals, and heavy equipment from the world’s most populous nation.
Both agreements share a notable trait: They keep CBAM in full force. But in the background, the von der Leyen administration has been less than steady on the policy and has floated a major change that could undermine the law’s efficacy.
Currently, CBAM doesn’t allow for any exemptions from the tariff. But in an amendment drafted in mid-December, the European Commission pitched giving itself the discretionary authority to temporarily remove the carbon levy from particular imports, and even retroactively apply the exemption.
Heavy industry groups and European parliamentarians across the political spectrum have balked at the commission’s proposal in recent weeks.
That’s because while the carbon tariffs are meant to reduce emissions, they also serve as a type of industrial policy that can level the playing field between foreign and domestic manufacturers. Industrial firms in the EU have long been required to offset their emissions by buying credits on the bloc’s Emissions Trading System market, driving the cost of their products higher than those of goods manufactured in countries without such rules.
CBAM rectifies this price discrepancy by subjecting foreign firms to the same carbon fees. For now, the price of carbon dioxide emissions will be calculated by averaging the auction price of Emissions Trading System credits each quarter. Starting next year, the pricing is set to more precisely track the ebbs and flows of overseas factories’ emissions by moving to a weekly average.
The idea that the EU may choose to exempt certain products could sap confidence in the policy and make it harder for foreign firms to justify long-term investments in new, cleaner assembly lines.
“It’s a big deal even before passing into law,” said Antoine Vagneur-Jones, the head of trade and supply chains at the consultancy BloombergNEF. ​“The prospect of sectoral exclusions, even temporary by nature, communicates worrying uncertainty to business at a time when the relevant investments in low-carbon European production require long-term policy visibility.”
The proposal, called Article 27a, has what he called ​“a few hoops to jump through first” before the European Commission could start removing tariffs on any industry. Namely, the European Parliament and the European Council will need to vote to approve the amendment. A vote is not yet scheduled.
The pressure for this ​“emergency brake” on CBAM is coming from a familiar force in EU politics: farmers.
French and Italian agricultural ministers pressed Brussels for the amendment over concerns that CBAM could drive up the price of fertilizer, squeezing farmers’ margins. Such a price shift could risk widespread protests like the so-called nitrogen wars that started in 2019, when the Dutch government’s crackdown on agricultural emissions triggered a revolt among farmers.
But even if the amendment is passed into law, the European Commission cannot halt tariffs at its pleasure. Before suspending the tariff for any products, it must run assessments to determine whether CBAM’s impact on prices of relevant goods, like fertilizer, is significant enough to justify doing so.
“It isn’t clear to me that fertilizer prices would go up by enough to warrant activating 27a over, say, the coming year — even if punitive default values were used,” Vagneur-Jones said. ​“My sense is that we won’t be seeing the provision’s activation anytime soon.”
Still, the proposed pullback highlights ​“a growing conviction among Europeans that the EU is more or less fighting climate change alone,” said Adam Błażowski, the supervisory board chairman of the climate group WePlanet, which advocates for what it sees as pragmatic solutions, such as nuclear power and genetically modified crops.
“This may not be entirely accurate, but this trend only increased after the United States’ second departure from the Paris Agreement,” he said. ​“Mechanisms like CBAM function to preserve a certain level of equality between different economies, but rapidly progressing climate change is a global problem that needs global solutions. Unfortunately in an age of kinetic and trade wars all around Europe, this seems to be an increasingly difficult task.”
Equipping CBAM with an emergency brake may also have practical benefits that go beyond placating political constituencies. It could reduce regulatory complexity, for example — something of increasing importance to EU leaders who want to rejuvenate domestic industries, protecting the continent against geopolitical aggression from Russia, China, and, of late, the U.S.
“Looking to the future of a low-carbon economy, we may not be able to move as fast as we might like, but we have to move as fast as we can,” said Joseph Hezir, the former finance chief of the Department of Energy and current president of the EFI Foundation, a nonpartisan energy-policy think tank. ​“The 27a discussion right now is really about, how fast can we move in that direction?”
Europe’s carbon tariff may soon have company. Several other countries are considering what Hezir called ​“CBAM-like programs,” including the United Kingdom, Canada, and Taiwan. In a Friday post on X in response to the Supreme Court’s decisions to strike down President Donald Trump’s tariffs, U.S. Sen. Bill Cassidy, a Louisiana Republican, called on the White House to champion his ​“Foreign Pollution Fee” bill, which ​“levels the playing field.”
CBAM’s impact is already being felt outside the 27-nation EU. In December, analyst Jian Wu cited the European tariffs as a major force behind China’s ​“thriving” hydrogen-fired metallurgy this year. With CBAM entering into force, he wrote in his newsletter China Hydrogen Bulletin, ​“Chinese steel exporters are facing real pressure to decarbonize their businesses.”
With 60% of its steel exports already headed for Europe before the signing of last month’s free-trade deal, India is also feeling the spur of CBAM on its notoriously coal-choked industrial and utility sectors.
Still, the policy is colliding with a harsh political climate. Anything that raises prices on European consumers is becoming radioactive, said Josh Freed, the chair of Catalyse Europe, a climate policy group.
“Since Russia’s invasion of Ukraine sent energy prices way up, Europeans’ tolerance for any policies that they perceive as increasing prices is nonexistent,” he said. As a result, ​“slowing down and adjusting” both CBAM and the Emissions Trading System schemes ​“is just policy meeting reality.”
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