The Carbon Border Tax is designed to impose a tariff on imported goods based on the carbon emissions associated with their production. The calculation of the tax is typically determined by evaluating the carbon emissions produced during the manufacturing process of the goods being imported. The specific methodology for calculating the carbon tax depends on various factors, but it generally follows these steps:
1. Emission Calculation of the Product
The first step in calculating a carbon border tax is to determine the amount of carbon emitted during the production of the goods. This is known as the carbon intensity of the product, which measures how much CO₂ is released per unit of production. For example, steel production using coal or coke has a much higher carbon intensity than steel produced using green hydrogen.
- Carbon Intensity (kgCO₂ per unit of product): The carbon intensity is typically calculated using lifecycle analysis, which considers emissions from raw material extraction, transportation, processing, and the final product.
2. Determining the Carbon Price in the Importing Country
Once the emissions of the product are calculated, the carbon price (or carbon tax rate) in the importing country is applied. This price is typically defined by the national or regional carbon pricing mechanisms (such as carbon taxes or cap-and-trade systems).
For example, the European Union‘s Emissions Trading System (ETS) sets a price for carbon emissions, which fluctuates based on market supply and demand for carbon allowances. In 2023, the price per tonne of CO₂ under the EU ETS has been hovering around €80–90 per tonne, but this can vary.
3. Application of the Carbon Border Tax
The carbon border tax is then applied to the imported product based on its carbon intensity and the applicable carbon price. For instance, if steel is imported from a country that does not have a carbon tax, the importing country (e.g., the EU) may levy a tariff equivalent to the emissions produced during the manufacturing of the steel. The tax amount would be calculated as: Carbon Border Tax=Carbon Intensity (kgCO₂)×Carbon Price per Tonne\text{Carbon Border Tax} = \text{Carbon Intensity (kgCO₂)} \times \text{Carbon Price per Tonne}
This means that the greater the emissions associated with the production of the goods, the higher the carbon border tax.
For example:
- If a tonne of imported steel has a carbon intensity of 1.8 tonnes of CO₂, and the carbon price is €80 per tonne, the carbon border tax would be:
1.8 tonnes of CO₂×€80=€144 per tonne of steel.1.8 \, \text{tonnes of CO₂} \times €80 = €144 \, \text{per tonne of steel}.
4. Exemption or Reduction Based on Domestic Carbon Pricing
Some carbon border tax schemes may offer exemptions or reductions for imports from countries that already have carbon pricing mechanisms in place. This ensures that countries with similar environmental regulations are not unfairly taxed. However, if a country does not have a carbon pricing system, the full carbon border tax is imposed.
Which Countries are Paying Carbon Border Tax?
The concept of Carbon Border Taxes is still relatively new, but several countries and regions have begun to implement or plan for such taxes as part of their efforts to tackle climate change. While the taxes are typically applied to the exports of countries without carbon pricing mechanisms, the importing countries are the ones enforcing these tariffs. Here’s an overview of how some regions are implementing carbon border taxes:
1. European Union (EU) – Carbon Border Adjustment Mechanism (CBAM)
The European Union is leading the way in implementing carbon border taxes. The EU’s Carbon Border Adjustment Mechanism (CBAM), launched in 2023, applies to certain high-emission goods, including steel, cement, aluminum, fertilizers, and electricity. The CBAM requires that these goods be subject to a carbon tax if they are imported into the EU from countries without equivalent carbon pricing systems.
The CBAM aims to prevent “carbon leakage,” where companies move their production to countries with laxer environmental standards. The EU has progressively been implementing this system, with full enforcement expected by 2026. During the initial phases (2023–2025), the CBAM will function as a reporting mechanism before fully implementing the tax.
2. United States
While the U.S. does not currently have a national carbon border tax, it is considering such measures. In 2021, the U.S. Congress introduced discussions around a potential carbon border adjustment as part of a broader push to address climate change. The U.S. government has indicated that it may impose carbon tariffs on imports from countries with weaker climate policies, particularly for high-emission products like steel and cement.
This idea is under active consideration as the Biden administration has made significant commitments to climate change, and any potential carbon border tax would align with the administration’s goal of reducing carbon emissions and creating a level playing field for U.S. industries.
3. Canada
Canada is also exploring a carbon border tax as part of its broader environmental policy. The Canadian government has expressed interest in implementing such a mechanism to protect Canadian industries from unfair competition. This tax would likely be targeted at high-emission products, such as steel, which are important to Canada’s manufacturing sector.
4. Australia
Australia has been considering the idea of a carbon border tax as well, but it has not yet implemented such a measure. However, the Australian government is actively engaging in discussions with its trading partners, especially in relation to the EU’s CBAM. As part of its international climate commitments, Australia is looking to ensure its industries remain competitive while addressing climate change concerns.
5. Other Countries
Several other countries are exploring or planning carbon border adjustments as part of their climate policies. These include:
- Japan: Japan is exploring a carbon border tax as part of its plans to reduce emissions by 46% by 2030. Japan is a significant exporter of industrial goods, so a carbon tax could impact its trade relationships.
- South Korea: South Korea is working on implementing a carbon pricing mechanism, and discussions around a carbon border tax are part of its climate action plan.
- Norway and Switzerland: Both countries have been active in global discussions about carbon border taxes and could potentially implement such measures in the future.
Real-World Example of Carbon Border Tax Impact
- In 2023, the EU’s CBAM imposed tariffs on steel produced without low-carbon methods. As global steelmakers transition to greener production methods, countries without carbon pricing systems will face higher tariffs, reducing their competitiveness in the European market.
- China, as the world’s largest producer of steel, is one of the countries that could be significantly impacted by carbon border taxes, especially with its reliance on coal for steel production. The EU’s CBAM could make Chinese steel less competitive in European markets unless China adopts more sustainable production practices, such as using green hydrogen.
How Green Hydrogen Can Help Avoid Carbon Border Tax Penalties
One of the most effective ways to avoid the impact of carbon border taxes is to transition to cleaner, low-carbon production methods, and green hydrogen offers a game-changing solution.
For industries like steel production, where emissions are traditionally high, switching from coal to green hydrogen allows companies to reduce their carbon intensity and become more competitive in the global market. As countries like the EU begin to impose carbon border taxes, steel producers that embrace green hydrogen will benefit from lower emissions and, consequently, lower or zero carbon border tax exposure. This could make their products more competitive in markets that impose carbon taxes, leading to long-term economic advantages.
In conclusion, the carbon border tax is quickly becoming an important factor in global trade, encouraging industries to adopt greener, more sustainable practices. Green hydrogen has the potential to transform high-emission sectors like steelmaking, offering a way to drastically reduce carbon emissions, comply with regulatory requirements, and avoid the financial impact of carbon border taxes.
