EU industry calls for urgent carbon border tax as prices soar

European industrial groups have stepped up calls for the EU to hasten the introduction of a carbon border tax as record prices for CO2 allowances raise the cost of polluting in the bloc far above any other region.

Carbon prices in the EU’s flagship Emissions Trading System, a cornerstone of the bloc’s ambitious new target to slash emissions 55 per cent by 2030, are within touching distance of €50 a tonne — more than double their pre-pandemic level.

While the rally has been welcomed by environmental groups and some companies as a potential boost for the clean-up of European power and manufacturing, it has left some industries wincing.

Tata Steel has already placed a €12-a-tonne carbon surcharge on metal produced in Europe, including the UK. While it claims this is necessary to cover its costs, the move risks disadvantaging the region’s production and exports.

Other industries, from cement to petrochemicals, have cautioned that the rally could starve them of funds to invest in decarbonisation.

“In the past, we did not have a significant problem with the carbon price because it was so low,” said Axel Eggert, director-general of the European Steel Association.

“Now, with the increasing price, we get into a real problem. One is our global competitors do not have those carbon constraints . . . the second point is it makes it much more difficult to invest in new technologies.”

One factor behind the EU’s carbon price rally is anticipation among traders and commercial buyers that supplies will tighten.

Under the ETS, power companies and manufacturers that exceed their carbon allowances must pay for more, while those left with surplus allowances can sell them for profit.

But the EU ultimately controls supply, and the number of allowances available will shrink over time. Some traders are predicting that prices will have to rise further to make alternative energy sources such as hydrogen competitive, but that risks piling huge short-term pressure on carbon-intensive industries. The UK’s post-Brexit version of the EU ETS is due for launch next month.

ArcelorMittal, one of Europe’s largest steel producers, said that without a global carbon price the EU would need to implement a carbon border tax on imports from beyond the bloc if the industry was to remain competitive.

The company said European producers were “at a competitive disadvantage versus international peers”, warning of “carbon leakage” should manufacturing move overseas to areas with less stringent environmental controls.

“This reinforces the urgent need for policies which help . . . ensure the competitiveness of European steel producers is maintained by applying carbon levies to all producers who sell into the European market,” the company said.

€3bn


Estimated annual hit to the EU steel sector from having to buy carbon allowances from the market

Steel producers estimate that the EU carbon price is now costing them approximately $95 per tonne of steel produced (the production of one tonne, on average, emits two tonnes of CO2). That is almost 10 per cent of the current steel price near €1,000 a tonne.

The European Steel Association has said members’ free allowances fall short by an average of 20 per cent each year, requiring them to buy carbon allowances from the market.

At current prices and with production last year of roughly 160m tonnes, that would imply an annual hit to the sector in the region of €3bn, assuming two tonnes of CO2 per tonne of steel.

Together with a carbon border tax, heavy industry trade associations are urging the EU not to reduce the allocation of allowances for energy-intensive sectors too quickly.

The EU is due to unveil proposals for a carbon adjustment border tax in June but its implementation is not expected before 2023 at the earliest.

The proposed carbon border mechanism is initially set to target limited goods including steel, cement, power generation and some chemicals, officials told the Financial Times, imported from non-EU countries that do not have equivalent carbon pricing or emissions targets.

One senior official acknowledged that Europe’s steelmakers were “under huge pressure” but said the commission would not be deterred from pushing such industries to accelerate their green transition.

Some companies said they recognised the tightrope the EU must tread in forming policies that can encourage industry to invest in green technology, raise the price of polluting and keep its own industry on a level playing field without violating World Trade Organization rules.

But chemicals groups also have concerns that sharply higher carbon costs may have the opposite effect intended by limiting capital available for innovation and scaling up low-carbon technologies.

“It is a fine line between encouraging investment and stifling it,” said Ineos, the privately owned petrochemicals group.

Others including Belgian chemicals company Solvay say the steady increase of carbon prices in the EU is something the industry has anticipated. The company said it started managing its 2021-2030 exposure to carbon price increases as early as 2017.

That was the year the EU moved to tighten the supply of allowances, after the market languished under an excess of supply in the years following the financial crisis, with prices too low to incentivise significant shifts away from dirtier fuels such as coal.

Cement companies also said the record EU carbon prices would accelerate investment into decarbonisation initiatives such as introducing low-carbon products and replacing fossil fuels with municipal waste in production. 

European heavy industry groups said the lofty prices would feed through to customers but that this would be difficult for commodities trading in global markets such as ammonia.

Marcel Cobuz, former European head at LafargeHolcim, said cement companies would need to recalculate their pricing models, which would result in “mechanical” price hikes for buyers such as construction groups.

“Cement prices which are passed down the value chain need to integrate the extra cost of CO2 but also the differentiation cost of offering the market low-carbon products,” he said.

Additional reporting by Mehreen Khan in Brussels