Europe Reaches Deal for Carbon Tax Law on Imports

If approved, as expected, the plan would impose tariffs on countries that fail to take strict steps to curb their greenhouse gas emissions.

The European Union has taken a step closer to adopting a ground-breaking carbon tax law that would impose a tariff on imports from countries that fail to take strict steps to curb their greenhouse gas emissions.

E.U. member states and the European Parliament reached a preliminary agreement on the proposed law on Monday night, and while the bill has yet to undergo legal checks and get final approval, E.U. officials said they expected it to easily clear the final hurdles.

“A historic agreement,” said Pascal Canfin, the chair of the Parliament’s Environment Committee. “We are putting carbon and climate at the heart of trade.”

The “carbon border adjustment mechanism” is aimed at protecting E.U. companies subjected to strict environmental rules from the risk of being crushed by competition with businesses from countries whose rules on emissions are looser. It is also designed to encourage other countries to adopt similarly ambitious emissions rules.

The European Union has for years had a program that charges companies for the pollutants they emit to encourage them to cut emissions. Companies can emit carbon dioxide until a set cap, above which they must buy permits and pay for the extra pollutants they release. Sectors covered include iron and steel, cement, aluminum and fertilizers.

Under the new law, which European officials say will be the first of its kind in the world, only countries adopting similar emissions curbs would be able to export to E.U. countries without paying additional fees. The aim, officials say, is a level playing field for carbon pricing.

The United States is looking at similar legislation, and last week the Biden administration sent a proposal to the European Union to impose tariffs on steel and aluminum produced in ways that harm the environment as part of efforts to tackle climate change.

The E.U. law is part of an ambitious environmental package aimed at cutting emissions to at least 55 percent below 1990 levels by 2030. This weekend, member states and members of the European Parliament are set to discuss phasing out allowances that the current carbon pricing system grants to some E.U. industries exposed to competition. This would avoid the new law giving those industries a double benefit, in violation of World Trade Organization rules.

Though some companies might want to keep their current allowances, E.U. officials said they were confident that they had enough support to push the package ahead.

The new law is expected to be approved by member states by the end of the year and the European Parliament in early 2023. The plan would be implemented starting in October next year, with a transition period until 2026 or 2027 to give companies time to prepare.

The law would potentially affect some E.U. trade partners in the targeted sectors, like Turkey, China, Britain and to a lesser level the United States, and critics there have opposed it. The Chinese leader Xi Jinping said that climate change should not be “an excuse for trade barriers,” according to the state media outlet Xinhua.

But Mr. Canfin dismissed the criticism.

“It’s not trade protectionism, it’s a level playing field,” he said, adding that trade would create incentives that international climate conferences were “not enough” to achieve. “What we are saying to Turkey or China is just: Put a carbon price.”