EU negotiators agree on historic carbon tariff

The Carbon Border Adjustment Mechanism (CBAM) is designed to shield EU industries against the risk of outsourcing production to regions with lower environmental standards, where the cost of compliance is lower. The hope is it will incentivise countries outside of the EU to follow suit.

"We can be really proud of the result. It sets a very good example and a strong message to the rest of the world. And I cannot imagine that other regions will not follow a similar mechanism," Chahim said. "I think that could be the best response."

CBAM will cover the production of steel, fertiliser, aluminium, cement, electricity generation, and hydrogen. The parliament also wanted to include emissions caused by energy used in the production process, but this will now only be included "under certain circumstances" and will be reviewed at a later date.

Most end products like cars, food or plastics are also excluded for now.

"We need to start focused and simple," Renew MEP Pascal Canfin, chair of the environment committee, said. "There is no equivalent system. That is why we need time to implement it."

CBAM will begin on 1 October 2023, from which point companies to which the system applies will have to start collecting data. The system will officially enter into force after a pilot period in 2026.

A review at the end of the pilot period will determine which end products will be added to the list. Specifically, the inclusion of organic chemicals and plastics will be discussed.

The current list is estimated to cover between 55 to 60 percent of emissions.

Free allowances

Negotiators are now gearing up for a new round of negotiations this weekend which could prove even more contentious.

Central to those talks is the issue of free allowances. CBAM is a levy directed at goods coming into Europe. But European companies are already paying a carbon price under its emission trading system (ETS).

To protect heavy polluters against companies outside Europe, a system of free allowances was built into it. With CBAM, these allowances will be phased-out — but the hot issue is timing.

Industry lobby groups have been pushing hard to delay the phase-out, warning that without this extra support, CBAM will fail to prevent companies from relocating to environmentally more lax countries outside the EU.

During the summer, Chahim had described the lobbying to slow down the phase-out as "extreme."

"Some want to have CBAM and keep free allowances. You cannot have your cake, eat it and have the cherry on top," he told press.

The parliament agreed in the summer to phase-out all free allowances by 2032. However, the commission and the member states prefer the free allowance system to remain until 2034.

Many analysts consider the co-existence of free allowances and a carbon border tax as a violation of World Trade Organization rules as it would no longer count as a climate measure but as a tool to protect domestic industries.

"If domestic companies do not pay for their emissions, there is no way to ask for CBAM at the border," Genevieve Pons, a former top EU official and current director of the Brussels-based think tank Europe Jacques Delors, said.

Debates between the parliament and member states will start on Friday and are expected to last until Saturday or Sunday.