These days, the heads of those responsible for foreign trade in key sectors of European industry are smoking in EU Commission webinars, while at the same time a whole phalanx of consulting firms are rubbing their hands and offering their services: This week, the introduction phase for a new Europe-wide climate protection tariff begins – it is difficult for the economy to understand.

The new tax is aimed at companies within the EU that are subject to the stricter conditions of the Green Deal from the President of the EU Commission Ursula von der Leyen (CDU) should produce more sustainably and therefore more expensively, actually protect them from competitors outside the European internal market who do not have to take climate protection so seriously. At the moment, however, it only creates one thing: confusion.

Climate protection tariff: Brussels is working on the BIG CBAM

The buzzword associated with it is called CBAM. The abbreviation stands for “Carbon Border Adjustment Mechanism” – loosely translated as a climate compensation levy for imports. The EU Commission is celebrating this innovation as a “milestone tool” to give products with a high carbon footprint from outside the EU a “fair” CO2 price tag.

The new “border adjustment system” envisaged for this purpose stipulates that from 2026 companies will compensate for the difference between the CO2 price in the EU and the countries from which they import intermediate products. CBAM is intended to prevent companies based in the EU from relocating climate-damaging production abroad.

Climate oomph with two sides

The instrument has a double edge: On the one hand, and the local industry certainly appreciates this, it is intended to reduce competitive disadvantages compared to non-EU competitors who can operate in a more climate-damaging manner with impunity. On the other hand, it blocks the way for the country to circumvent the strict local regulations and benefit from cheap re-imports. In EU jargon, this is called “carbon leakage” – carbon dioxide loopholes.

“CBAM compensates for international competitive disadvantages in some areas, but creates new ones in other areas,” says the German Chamber of Commerce and Industry (DIHK). In view of the gradual interaction of the new measures with the system of European certificate trading for CO2 emissions, it is difficult to understand from a layperson’s perspective how the effects will actually turn out – and apparently not even to sophisticated experts.

EU is rushing forward – world trade conflicts are looming

The instrument now introduced by the EU is virtually unprecedented worldwide. Only Australia is currently considering trying it out. The chairman of the European Parliament’s Trade Committee, Bernd Lange (SPD), admits: “There are very few countries in the world that have a CO2 price.” In fact, this makes the EU unique. There are still “unresolved questions”. It is crucial to offset “increased costs due to the Green Deal”, to motivate trading partners to do more climate protection and “to live in partnership with other countries”.

The trade policy consequences of the experiment are currently unclear. Lange says mildly that the EU’s international trading partners are “a bit skeptical” about the climate protection tariff. The South African steel industry, for example, has already expressed concerns. The DIHK warns more drastically about impending trade conflicts: “Many countries criticize CBAM and demand exceptions or threaten to sue the World Trade Organization (WTO) and take countermeasures.”

Is the WTO hammer coming – or retaliatory tariffs?

The EU Commission assures that its new climate tariff is in line with WTO rules. However, there has been no shortage of warnings about a conflict with international trade rules in the discussion about CBAM. The World Trade Organization is currently keeping a low profile. Its 2023 report simply said that some member states of the organization had expressed concerns. According to the WTO’s general advice, internationally uncoordinated environmental protection policies could lead to retaliatory measures in trade relations.

“The EU is taking the second step before the first,” complains Volker Treier, DIHK head of foreign trade. “Until at least our most important trading partners have also introduced a CO2 price, the climate tariff is premature and leads to distortions of competition in many areas.” In other words, the opposite of what was actually intended.

Obligation to provide proof down to the last screw

A few days before the start of the globally unique experiment, the DIHK criticized the “hasty and very bureaucratic implementation” of the project. It initially begins with proof requirements for the import of supplies, which, according to the DIHK, also apply to “everyday products”, for example imported screws, if the value of the delivery exceeds 150 euros. This is a burden for mechanical engineering or metal processing, for example, which cannot order enough screws within the EU.

“Highly complex calculation and verification methods” are required, and the regulations for this have only been known since mid-August. “To this day, we don’t even know which authority in Germany is responsible for CBAM,” complains Treier. Its experts fear “a major administrative burden” for small and medium-sized companies. In some cases they don’t even know to what extent they are actually affected. Errors and missed deadlines are programmed.

Brussels’ new “Latin students” have to educate their classmates along with them

The complicated calculation system is already alerting companies from the iron, steel, aluminum, fertilizer, hydrogen, cement and electricity sectors – as no duty has yet been levied, but an extensive reporting requirement will be in place in a transitional phase until January 1, 2026. They must be the first to prove how climate-friendly their supplies from outside the EU are. According to the DIHK, foreign manufacturers will have to make a variety of data available to their EU customers in the future – the costs of proof would be reflected in the prices.

Wolfgang Große Entrup, General Manager of the German Chemical Industry Association (VCI), describes this effort as follows: Importers and users of imported products currently have to fight through hundreds of pages of legal text and guidelines. “The companies feel like students who have to teach Latin to their new foreign classmates in just a few weeks – even though they themselves have only just started learning,” he adds. Every Latin student has learned “Ora et labora”: pray and work.