Insight

The Carbon Conundrum

Companies that trade internationally might soon face a “carbon tariff” when importing certain goods into the European Union. Why is the EU doing this—and how will it affect world trade?

Power plant billowing smoke
MH

Martin Hamer and Natalie Kopplow

September 29, 2022 04:30 PM

Striving to make Europe the first “climate-neutral” continent, the European Union has committed to reducing its net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, and to achieve full climate neutrality by 2050. These goals are the heart of a set of policy initiatives the European Commission announced in 2019 under the framework of the European Green Deal.

Carbon Pricing in the EU

For almost two decades, carbon pricing in the form of the EU Emissions Trading System (EU ETS) has been the flagship of the union’s fight against climate change. EU ETS is a market-based instrument that aims to incentivize the reduction of carbon emissions where it’s most cost-effective. It sets a cap on the total amount of emissions that can be released from electricity- and heat-generation facilities, installations in certain energy-intensive industry sectors and flights within the EU.

Companies covered by EU ETS must buy sufficient emission allowances for the greenhouse gases they emit. The cost of such allowances has risen from about €8 per metric ton of emissions at the start of 2018 to almost €100 as of August 2022.

EU ETS was the world’s first major carbon market; it remains the largest. According to the European Commission, EU ETS has reduced emissions cost-effectively, noting that installations covered by the program lowered them by about 35% between 2005 and 2019, which in turn has inspired other countries and regions to develop their own emissions trading systems.

The Risk of Carbon Leakage

Notwithstanding the EU’s efforts to achieve climate neutrality, large parts of the world have not yet priced greenhouse gas emissions. Given the lack of a level international playing field for business carbon pricing, companies in places with higher carbon costs (such as the EU) face a competitive disadvantage.

The EU’s strict climate policies therefore bear the risk of so-called “carbon leakage”—the shift of emissions from a country with rigid climate rules to another with more permissive standards. Carbon leakage occurs if EU-based businesses move their carbon-intensive production abroad to cut costs, or if countries replace EU products with cheaper, more carbon-intensive imports.

The cost of such allowances has risen from about €8 per metric ton of emissions at the start of 2018 to almost €100 as of August 2022."

So far, the EU has addressed the risk of carbon leakage by granting a certain number of free allowances to EU producers in sectors considered to be at a significant leakage risk. However, these allowances dampen the incentive to invest in climate-friendly production. As a result, the European Commission is striving to lower the number of free allowances for the sake of reaching the EU’s ambitious climate goals.

The Proposed EU Carbon Border Adjustment Mechanism

For these reasons, the European Commission has proposed a new instrument to equalize the price of carbon between domestic products and imports: the Carbon Border Adjustment Mechanism (CBAM), which might soon replace the system of free allowances.

Under CBAM, EU importers would be required to register with a CBAM authority and regularly report the emissions embedded in their imported goods—obligations that may come into effect around January 2023. Presumably beginning in 2027, importers would then have to buy carbon certificates to offset the imported goods’ emissions. The price for CBAM certificates would correspond to the carbon price that would have been paid had the goods been produced within the EU, mirroring the price for EU ETS allowances. Concurrent to CBAM’s phased implementation, free allowances would be phased out.

CBAM would depart from EU ETS in several respects. Most importantly, there would be neither a cap on available certificates, nor the ability to trade them. Under CBAM, if non-EU producers can show they already paid a price for the carbon emitted in the production of the imported goods, they’ll be able to fully deduct those costs. CBAM would therefore aim not only to help reduce the risk of carbon leakage but also encourage producers in non-EU countries to “green up” their production methods.

Possible Effects on International Trade

Whether CBAM—often called a “carbon tariff”—would be consistent with international trade rules, in particular the framework of the World Trade Organization, has been the source of a great deal of discussion. Some experts worry the EU’s introduction of CBAM would be seen as a disguised form of trade protectionism, thereby potentially irritating international partners and starting a trade war. (No countries outside the EU have implemented such a mechanism.)

EU legislators, cognizant of this potential backlash, have drafted their regulations carefully, explicitly aiming to maximize their compatibility with WTO rules. Further, the legislative process has been accompanied by diplomatic efforts both to increase acceptance among the international community and spur cooperation on carbon pricing.

Martin Hamer is a shareholder at the global law firm Greenberg Traurig and heads the German Environmental Group. He focuses on environmental matters including soil and groundwater contamination, environmental permits, nature protection, waste management, mining, and climate protection. Martin represents clients in complex permit procedures vis-à-vis public authorities, environmental liability litigation and public law contract negotiations.

Natalie Kopplow is an associate in the German Environmental Group at Greenberg Traurig. She advises national and international clients on environmental law, climate protection and energy law.

Headline Image: ISTOCK/Delectus, ISTOCK/COSPV

Related Articles

Hobbling the War Machine


by Shawn C.D. Neylan

Since late spring, the Canadian government has been actively sanctioning business and political entities, as well as numerous individuals, with alleged ties to Vladimir Putin and the Russian military, including some in Belarus. You can’t tell the players without a scorecard—so here’s an overview.

Military tank with prohibited symbol

Growing Canadian Business Abroad


by Didier Culat

Canadian entrepreneurs looking to expand their businesses beyond the geographic confines of their home dominion must consider a vast range of questions to ensure they’re fit to branch out. Here’s a quick primer.

Green arrows rising with Canada in backdrop

Latinflation


by Alejandra Daroch, Domingo Russi and Jaime Carey Astaburuaga

Long a beacon of economic stability in South America, Chile has been buffeted lately by the global rise in inflation. Can a key element of its monetary policy help it weather the storm?

Waves crashing into lighthouse

The Antipodean Advantage


by Gordon Grieve and Tony Britten-Jones

As the pandemic recedes, Australia remains one of the best countries in which to invest. The commercial law experts at Piper Alderman review the country’s advantages when it comes to outside money looking for outsized returns.

Man pointing to cave wall

It’s Official: Options for Challenging “Official Marks” in Canada


by Jamie-Lynn Kraft and Philip Lapin

“Official marks” are a strangely obscure corner of Canadian intellectual-property law. What are they, what explains their strength and what can a business owner in search of a trademark do to challenge them?

Two griffins on royal crest

The Future of Trade is Digital


by Alan de Rochefort-Reynolds, Daniel Allman and Jo Feldman

Digital information increasingly drives bilateral and multilateral trade throughout the Indo-Pacific region. It behooves countries to devise agreements governing the use and exchange of the enormous amounts of vital data generated every day.

Neon colored boxes in circle with black background

Competitive Balance


by David Feldman and Peter Flynn

Major amendments to Canada’s Competition Act were rushed through Parliament this June with scarcely any debate. They will likely have enormous antitrust ramifications—and businesses had better be ready.

Blaring megaphone sounds the alarm

Rental House of Cards


by Tyler D’Angelo

The pandemic devastated uncountable businesses worldwide. A recent court case involving some of Canada’s most venerable companies and pension funds sheds light on the stringency of the country’s commercial leases—and the judiciary’s reluctance to meddle in sophisticated commercial contracts amid a “black swan” event.

Toppling house of cards

IN PARTNERSHIP

From Allegations to Action: Navigating Legal Options for Sexual Abuse Survivors


by Wagners Law Firm

All too often, instances of sexual abuse occur within an institutional environment. Read more to find out what to do in cases of sexual and institutional abuse.

Animated woman sits with her eyes closed

Woman on a Mission


by Rebecca Blackwell

Baker Botts partner and intellectual property chair Christa Brown-Sanford discusses how she juggles work, personal life, being a mentor and leadership duties.

Woman in green dress crossing her arms and posing for headshot

Best Lawyers Celebrates Women in the Law: Ninth Edition


by Alliccia Odeyemi

Released in both print and digital form, Best Lawyers Ninth Edition of Women in the Law features stories of inspiring leadership and timely legal issues.

Lawyer in green dress stands with hands on table and cityscape in background

Is Premises Liability the Same as Negligence?


by Jeremy Wilson and Taylor Rodney Marks

In today's age, we are always on the move, often inhabiting spaces we don't own. But what happens when someone else's property injures you or someone you know?

A pair of silhouetted legs falling down a hole with yellow background

Things to Do Before a Car Accident Happens to You


by Ellie Shaffer

In a car accident, certain things are beyond the point of no return, while some are well within an individual's control. Here's how to stay legally prepared.

Car dashcam recording street ahead

IN PARTNERSHIP

Athea Trial Lawyers: Be a Part of HerStory


by Justin Smulison

 Athea Trial Lawyers headshot gold jewlery black top

IN PARTNERSHIP

Salvi & Maher, LLP: Legal Leaders in Illinois and Wisconsin


by Justin Smulison

For more than 35 years, Salvi & Maher LLP has defended their clients throughout Illinois and Wisconsin in various areas of personal injury law, including medical malpractice, motor vehicle accidents, premises liability and trucking litigation.

Salvi & Maher Law Firm group in front of legal library and cases of books

IN PARTNERSHIP

Common Personal Injury Claims and the Importance of Hiring a Lawyer


by Joshua Michael Palmintier

The Palmintier Law Group sheds light on why it's crucial for individuals to hire legal representation when facing one of many different personal injury claims.

Hard hat on the floor with person in the background

Trending Articles

Presenting The Best Lawyers in Australia™ 2025


by Best Lawyers

Best Lawyers is proud to present The Best Lawyers in Australia for 2025, marking the 17th consecutive year of Best Lawyers awards in Australia.

Australia flag over outline of country

How To Find A Pro Bono Lawyer


by Best Lawyers

Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.

Hands joined around a table with phone, paper, pen and glasses

How Palworld Is Testing the Limits of Nintendo’s Legal Power


by Gregory Sirico

Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.

Animated figures with guns stand on top of creatures

Announcing The Best Lawyers in New Zealand™ 2025 Awards


by Best Lawyers

Best Lawyers is announcing the 16th edition of The Best Lawyers in New Zealand for 2025, including individual Best Lawyers and "Lawyer of the Year" awards.

New Zealand flag over image of country outline

Announcing The Best Lawyers in Japan™ 2025


by Best Lawyers

For a milestone 15th edition, Best Lawyers is proud to announce The Best Lawyers in Japan.

Japan flag over outline of country

The Best Lawyers in Singapore™ 2025 Edition


by Best Lawyers

For 2025, Best Lawyers presents the most esteemed awards for lawyers and law firms in Singapore.

Singapore flag over outline of country

How Much Is a Lawyer Consultation Fee?


by Best Lawyers

Best Lawyers breaks down the key differences between consultation and retainer fees when hiring an attorney, a crucial first step in the legal process.

Client consulting with lawyer wearing a suit

Presenting the 2024 Best Lawyers Employment and Workers’ Compensation Legal Guide


by Best Lawyers

The 2024 Best Lawyers Employment and Workers' Compensation Legal Guide provides exclusive access to all Best Lawyers awards in related practice areas. Read below and explore the legal guide.

Illustration of several men and women in shades of orange and teal

Things to Do Before a Car Accident Happens to You


by Ellie Shaffer

In a car accident, certain things are beyond the point of no return, while some are well within an individual's control. Here's how to stay legally prepared.

Car dashcam recording street ahead

Combating Nuclear Verdicts: Empirically Supported Strategies to Deflate the Effects of Anchoring Bias


by Sloan L. Abernathy

Sometimes a verdict can be the difference between amicability and nuclear level developments. But what is anchoring bias and how can strategy combat this?

Lawyer speaking in courtroom with crowd and judge in the foreground

Attacked From All Sides: What Is Happening in the World of Restrictive Covenants?


by Christine Bestor Townsend

One employment lawyer explains how companies can navigate challenges of federal and state governmental scrutiny on restrictive covenant agreements.

Illustration of two men pulling on string with blue door between them

The Push and Pitfalls of New York’s Attempt to Expand Wrongful Death Recovery


by Elizabeth M. Midgley and V. Christopher Potenza

The New York State Legislature recently went about updating certain wrongful death provisions and how they can be carried out in the future. Here's the latest.

Red tape blocking off a section of street

Georgia Proposes Law Requiring Parental Consent for Minors on Social Media


by Gregory Sirico

With data collection on the rise, Georgia lawmakers are currently petitioning for Senate Bill 351, which would require a user's age before social media use.

Teenager with hood on using phone as notifications pop up

Colorado Attorney General Calls For Cannabis Reclassification


by Gregory Sirico

In this article, Best Lawyers highlights a recent call to action by the Colorado state attorney general, requesting a full drug reclassification of cannabis.

Cannabis buds sitting on a checkerboard tabletop

6 Ways a Lawyer Can Help You With Your Medical Malpractice Claim


by Adam Malone

If you believe you have a medical malpractice claim, contact an experienced medical malpractice lawyer. Read on to learn how they can help with your claim.

Doctor in white lab coat showing x-ray to patient in blue scrubs

An Employer’s Guidebook to Responding to Online Harassment


by Belle Harris and Brent Siler

Navigating online defamation against your business requires strategic responses. Two employment lawyers guide how to leverage contracts, understand social media limitations and the risks of legal action.

Image of person pushing giant phone with mouth and words coming out