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EC to include power in EU carbon border import tax plans

06 March 2020 | Trading

Electricity imports to the EU should be subject to planned carbon border financial adjustments to ensure fair international competition as the EU seeks to become climate-neutral by 2050, EU economy commissioner Paolo Gentiloni said Thursday.

The EU currently imports electricity from non-EU countries such as Ukraine, Russia and Serbia, and now also the UK as a newly non-EU country.

"We will put a carbon price on imports to deter polluting processes from shifting elsewhere, and to prevent polluting products from flooding the market," Gentiloni told a tax event in Brussels hosted by the EPC thinktank.

"Obviously one sector is electricity and this is for sure [to be included]," he said.

The European Commission wants to define the key principles and other sectors to include in the so-called "carbon border adjustment mechanism" before the summer, he said.

The aim is to ensure that the EU's energy-intensive industrial sectors, including power generation, steel, oil refining and heavy manufacturing, are not undercut by competition from countries with weaker carbon constraints, such as China and the US.

Any import mechanism will have to comply with World Trade Organisation rules.

"The possibility of this mechanism to fly and be WTO compatible is linked to the number of sectors and the intensity of their carbon emissions to justify the measure," Gentiloni said.

The EC plans to start talks with the WTO and its global partners on the mechanism after the summer.

It plans to make a formal legislative proposal next year, and is consulting until April 1 on what to include in it.

The EC is being careful not to describe the mechanism as a tax, both because of the WTO implications and because all EU-level tax proposals need unanimous approval from EU governments to become binding, which is very difficult to achieve.

The planned mechanism is part of the EC's new European Green Deal strategy intended to make the EU climate-neutral by 2050.

The deal also includes a commitment to raise the EU's binding 2030 carbon reduction target to at least 50% below 1990 levels from the current 40% goal, and to revise both the EU's Emissions Trading System and its energy taxation directive.

The EC plans proposals on the 2030 target in September, and the EU ETS and energy taxation directive in June 2021.

Carbon leakage measures

The EU currently addresses the risk of carbon leakage -- production shifting outside the EU - by giving the sectors most exposed to global competition, such as steel, free EU ETS allowances.

Some sectors may also be at risk of indirect carbon leakage owing to higher electricity costs from higher EU ETS carbon prices.

The separate carbon border adjustment mechanism would have to be compatible with the EU ETS, and reflect the EU carbon price, the EC said in its consultation document.

"Various options could include a carbon tax on selected products -- both on imported and domestic products, a new carbon customs duty or tax on imports, or extending the EU ETS to imports," it said.

The mechanism could be based on harmonized EU benchmarks for industrial processes, such as those developed for the EU ETS, or other approaches, such as defining the carbon content of products.

The EC said it expects the mechanism to make it more expensive to import carbon-intensive products, and that this could "spur changes toward more sustainable products in the EU and in third countries."


Source: S&P Global