How could the EU’s green tariff impact businesses?

In mid-December 2022, the EU became the first large economy to introduce a ‘green tariff’, which will be levied on high-emission goods imported into the bloc.

Member states still need to iron out the details, but the new legislation may have a big impact on industries worldwide. In this article, we look at how the EU’s green tariff could affect businesses.

What is the new green tariff?

The carbon border adjustment mechanism (CBAM) is part of the EU’s push for a greener economy. Under the CBAM, imports into the EU will essentially be subject to a carbon tax. Companies will be required to report on their emissions, with high-carbon goods facing penalty charges.

The main goal is to prevent what’s known as ‘carbon leakage’. As the EU enforces more stringent environmental regulations within its borders, companies that remain within the bloc could be at a competitive disadvantage. Greener firms will find themselves undercut by those operating in countries with softer regulations, and some may choose to move operations overseas to benefit from cheaper production costs.

Of course this would undermine the EU’s attempts to clean up its economy and could see an industry exodus out of the bloc, so the EU introduced the CBAM.

Initially the CBAM will only affect imports of iron and steel, cement, fertilisers, aluminium, electricity, hydrogen, and some chemicals. A trial period should come into effect from October 2023, provided EU member states can ratify the agreement.

At first companies will only need to report the emissions associated with the goods they sell. At a later stage, levies will be applied to higher-emission goods and products.

How will it impact business?

Higher costs around EU imports

Firms producing goods within the EU stand to benefit the most from the CBAM, as it will hopefully create a level playing field and stop foreign companies undercutting them on the EU market.

On the other hand, companies exposed to the green tariff could face increased costs. Goods producers who export to the EU will have to comply with more regulatory scrutiny, with the increase in admin alone potentially exacting a toll. If their green credentials aren’t up to scratch, they eventually may have to pay a further charge.

Meanwhile, businesses within the EU who purchase these foreign imports could see their costs increase, too, as producers may not be willing or able to absorb all the costs of the tariff.

Accelerate the green transition

On a more positive note, the new legislation could help speed up the EU’s transition to a greener economy, and perhaps even encourage companies outside of the bloc to clean up their operations.

By disincentivising moving out of the EU, the CBAM will hopefully mean more companies choose to stay within the bloc and focus on finding more environmentally friendly processes, products and suppliers.

This, in turn, could drive green growth. As companies seek to reduce their emissions, the demand for new technologies and services will increase.

Trade retaliation from other countries

One potential risk of the CBAM is that it might provoke retaliation from other countries. If the EU slaps tariffs on steel from China or chemicals from the US, those countries may respond with tariffs of their own.

This threat comes at a time of increased protectionism and heightened geopolitical tensions. The shock of the Covid pandemic highlighted the fragility of global supply chains, prompting many countries to ramp up domestic production. Meanwhile, the rift between the West and rival powers Russia and China seems to be widening.

Even tensions between the US and the EU – typically political allies – are growing. The Biden administration recently unveiled its Inflation Reduction Act, which includes $369bn in spending on green policies. The EU is responding with its own Net-Zero Industry Act, as the two superpowers jostle for space in the global renewable sector.

Of course, increased tariffs and trade barriers would be bad for international trade. Meanwhile, domestic producers may benefit from subsidies and tax cuts.

Overall, it looks like the green transition is picking up pace, and it could prove disruptive. Businesses need to be resilient and agile to avoid the risks while capitalising on the opportunities.

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