EU Targets Climate Neutrality With Carbon Duty

Sustainability

By Last summer, the European Commission presented the Fit for 55 climate action package, the main objective of which is to reduce net greenhouse gas emissions within the EU by at least 55% by 2030. An essential part of the package is a unique instrument, a carbon duty, which is expected to be introduced in 2023 according to the draft legislation of the ECOFIN.

Every year the EU’s current emission trading system (EU ETS) imposes a higher cost element on industrial activities resulting in carbon dioxide emission, thus making polluting products increasingly expensive. However, this upward price effect is not enforced when these same products are produced by non-EU market players, who gain a clear competitive edge.

To address this situation, ECOFIN, composed of the economics and finance ministers of European Union member states, adopted draft legislation at the beginning of mid-March this year, based on which a carbon duty would be implemented within the EU from 2023.

The measure would levy taxes on imported products based on the carbon footprint of their production. According to this concept, as a first step, imported iron and steel, aluminum products, as well as cement, electricity and fertilizers would be affected, but this list may be extended.

The name “carbon duty” is misleading, as it is more of a hybrid public charge that sits on the borders of a import duty, a tax, and a carbon quota.

The close link with customs is underlined by the fact that the greatest obligations lie at the importer of the said goods and the affected products are listed based on their customs tariff classifications. This is reinforced by the fact that the draft defines the affected range of products based on the CN codes of the tariff classification.

Technically, however, carbon duties cannot be considered customs duty-type items since they are not levied by the customs authority; instead, the importer has to purchase and present the neccessary amount of quota by May 31 of the year following the subject year.

Regulatory logic prefers gradual implementation. In the first two years, EU market players would not yet be obliged to purchase quotas, but the necessary permits would have to be obtained from Jan. 1, 2023. Additionally, regular quarterly declarations would have to be submitted to the authority from that date.

Countries of Origin

The regulation is expected to differentiate between countries of origin. Accordingly, no or a reduced level of obligations will arise if the product is from a country that applies a quota system similar to the EU ETS.

At this point, several outstanding points need to be clarified in respect of the implementation of the carbon duty. Some of these are not only of methodological or technical nature but even political or environmental ones.

Looking a little further ahead, the role of the carbon duty in influencing international trade will need to be analyzed in more depth. Several countries have already expressed concerns about the concept, arguing that this measure is more of a tool to protect the EU’s internal market and European producers.

The priority of the environmental objective will also need to be verified to implement the regime and the EU will need to demonstrate that the funds from carbon duty are spent on green investments. Otherwise, the carbon duty will contradict the ambitions and operating principles of the World Trade Organisation.

There are also serious debates on the impact of the carbon duty between Hungarian manufacturers and traders as well as players from the processing and construction industries. Will it lead to higher prices for raw materials or, which is more relevant for everybody, will the price of electricity increase?

Until the final answers are given, companies within the EU now have to assess how carbon duty will affect them. Several industries could be directly impacted from the beginning, either through administrative obligations or changes in prices. These include construction, the automotive sector, and energy, though, in some instances, even food production could be affected due to the rise in agricultural input prices.

Companies must examine whether they acquire goods subject to this duty and if so how they intend to comply with the respective provisions, especially the way of obtaining the necessary licenses and fulfilling the quarterly declaration requirements. They will also need to consider how they will obtain the necessary permits by the end of the year and how they intend to fulfill the quarterly declaration requirement.

This article was first published in the Budapest Business Journal print issue of June 3, 2022.

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