EU carbon border levy limbers up for a soft launch - Reuters

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European Commission Executive Vice-President for the European Green Deal, Frans Timmermans speaks during a news conference on pollution in Brussels, Belgium May 12, 2021.

LONDON, July 13 (Reuters Breakingviews) - Europe’s trailblazing carbon border levy is facing a decidedly soft launch. When the European Commission’s climate tsar Frans Timmermans outlines on Wednesday how he plans to cut bloc-wide emissions 55% by 2030, a tax on dirty imports will be a key component. But it will likely be a fudge.

With carbon prices having more than doubled to 52 euros a tonne since November, the levy, officially called a carbon border adjustment mechanism, should be a blessing for Europe’s industrial groups. A 60 euro per tonne carbon price would leave the cement sector alone facing a cumulative 12 billion euro bill by 2030, according to JPMorgan. That’s because the bloc’s companies must offset their carbon emissions by buying permits via the European Union’s Emissions Trading System (ETS), which Timmermans will this week expand. Without an equivalent tariff on imports, overseas firms not exposed to the rising cost of carbon would undercut European companies.

Yet a carbon levy comes with a quid pro quo that many big companies don’t like. For the last 15 years, industrial sectors like cement have received protection from foreign competition by being handed free ETS permits. With a carbon tariff in place, these become superfluous and will therefore be stopped. If this happens by 2026, the cumulative 2030 bill for the cement industry might jump to 41 billion euros, JPMorgan reckons. Offsetting that would require unrealistic price increases and raise the risk of job cuts.

There are other reasons for Timmermans to tread carefully. A carbon border levy will hit trade partners like Russia and Turkey, who might retaliate. Emerging markets like India have labelled it discriminatory. And too radical a package would almost certainly be gutted by European politicians.

Wednesday’s package is therefore likely to pull its punches. According to one draft, the border levy will only raise 10 billion euros annually and won’t kick in until 2025. Moreover, European companies will likely keep getting free ETS permits for a decade after that. That could keep the price of carbon, vital to bring down emissions, lower than it otherwise would be. And any deal that penalises foreign companies but lets domestic ones hang on to subsidies could fall foul of World Trade Organization rules. Still, the true importance of Europe’s carbon border levy is to set a precedent for others like the United States to follow. That probably justifies a bathetic debut.

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CONTEXT NEWS

- The European Union will on July 14 set out a raft of new plans designed to cut carbon emissions drastically over the next decade.

- The "Fit for 55" package will face months of negotiations between the 27 EU countries and the European Parliament. The European Commission will propose 12 policies targeting energy, industry, transport, and the heating of buildings. Brussels will also announce the details of its world-first carbon border tariff, targeting imports of goods produced abroad with high emissions such as steel and cement.

- A leaked draft of one proposal would tax polluting jet fuel for the first time and give low-carbon aviation fuels a 10-year tax holiday. A revamp of the EU carbon market is also expected to hike CO2 costs for industry, power plants and airlines, and force ships to pay for their pollution.

- Tougher EU CO2 standards for cars could effectively ban sales of new petrol and diesel cars in 2035. EU countries will face more ambitious targets for expanding renewable energy. The proposals would also push EU industry to invest in expensive green technologies.

- The policies, if approved, would put the bloc - the world's third-largest economy - on track to meet its 2030 goal of reducing planet-warming emissions by 55% from 1990 levels. By 2019, the EU had cut its emissions by 24% from 1990 levels.

Editing by Neil Unmack and Karen Kwok

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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