Carbon leakage: Prevent firms from avoiding emissions rules

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MEPs want a more ambitious carbon levy on imported goods to stop companies moving outside the EU to avoid emissions standards, a practice known as carbon leakage, Society.

As European industry struggles to recover from the Covid-19 crisis and the impact of the war in Ukraine, the EU is trying to honour its climate commitments, whilst keeping jobs and production chains at home.

Around 27% of global CO2 emissions from fuel combustion come from internationally traded goods and emissions from EU imports have risen, undermining its climate efforts.

Discover how the EU’s recovery plan prioritises creating a sustainable and climate-neutral Europe.

An EU carbon levy to prevent carbon leakage

EU efforts to reduce its carbon footprint under the European Green Deal and become sustainably resilient and climate neutral by 2050, could be undermined by less climate-ambitious countries. To mitigate this, the European Commission proposed a Carbon Border Adjustment Mechanism (CBAM) in July 2021 , which would apply a carbon levy on imports of certain goods from outside the EU.

This mechanism is also part of a series of laws being adjusted under the Fit for 55 in 2030 package to deliver on the European Climate Law, through a decrease of greenhouse gas emissions of at least 55% by 2030 compared to 1990 levels. How would a European carbon levy work?

If products come from countries with less ambitious rules than the EU, the levy is applied, ensuring imports are not cheaper than the equivalent EU product.

Given the risk of more polluting sectors relocating production to countries with looser greenhouse gas emission constraints, carbon pricing is seen as an essential complement to the existing EU carbon allowances system, the EU’s emissions trading system (ETS). What is carbon leakage?

Carbon leakage is the shifting of greenhouse gas emitting industries outside the EU to avoid tighter standards. As this simply moves the problem elsewhere, MEPs want to avoid the problem through this new carbon leakage instrument

Existing carbon pricing measures in the EU

Under the current emissions trading system (ETS), which provides financial incentives to cut emissions, power plants and industries need to hold a permit for each tonne of CO2 they produce. The price of those permits is driven by demand and supply. Due to the last economic crisis, demand for permits has dropped and so has their price, which is so low that it discourages companies from investing in green technologies. In order to solve this issue, the EU will reform ETS – as foreseen under the Fit for 55 package.

What the Parliament is asking for

In a report adopted by the environment committee on 17 May, MEPs call for the Carbon Border Adjustment Mechanism to be extended to more products, including aluminium, hydrogen and chemicals and to cover so-called indirect emissions from the electricity used in manufacturing. They also want the mechanism to be implemented faster, from 1 January 2023, with a two-year transitional period and extended to all sectors of the ETS by 2030.

By 2020, the Carbon Border Adjustment Mechanism should cover power and energy-intensive industrial sectors, which represent 94% of the EU’s industrial emissions and still receive substantial free allocations, according to MEPs. These free allowances should be phased out by 2030 when the mechanism should fully cover the protected industries.

MEPs support the Commission proposal to use the revenues generated by the sale of mechanism certificates as new own resources for the EU’s budget.

In addition, at least the equivalent in financial value to the revenues generated by the mechanism, should be channelled to the least developed countries to help with the decarbonisation of their manufacturing industries.

The report also calls for a centralised EU authority for the Carbon Border Adjustment Mechanism, rather than one in each EU country.

MEPs will vote on the report during the plenary session on 6-9 June.

Learn more about the EU’s responses to climate change and its role in international climate negotiations.

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