Taxing carbon emissions is one of the most effective ways of dealing with the climate crisis. And also one of the fairest—the more you pollute, the more you pay. Carbon emissions, specifically the burning of fossil fuels, are after all the cause of the crisis.
The European Union’s Emissions Trading System (ETS) is intended to fill that role. A market-based system, it sets a cap on the total amount of greenhouse gasses that can be emitted by installations included in the system. A price for carbon is created by companies trading emission allowances. The result is a “fair price” on carbon emitted during the production of emissions-intensive goods.
A problem occurs with goods imported into Europe. If they have not been subject to a carbon tax in their home country, they gain an unfair advantage over similar goods produced in Europe. There is what’s called “carbon leakage”—emissions escaping any taxation.
In order to stem the leakage, in 2026 the EU will start imposing the Carbon Border Adjustment Mechanism (CBAM), the world’s first carbon border tax. The measure is necessary to avoid undermining Europe’s climate objectives.
The CBAM will impose a cost on goods such as steel, fertilizers, cement and aluminum imported from outside the EU. Importers will be required to purchase CBAM certificates to cover emissions associated with the goods. The cost of the certificates is expected to be the same as the EST market price.
The CBAM will encourage countries selling goods to Europe to institute their own carbon taxes thereby avoiding the CBAM. They will collect the revenue themselves rather than the EU. According to Nicolas Endress, founder and CEO of ClimEase, a CBAM software solutions company, “Countries that evolve with the change and build credible carbon pricing will defend their industries, while those that pull away will watch their exporters ultimately face the consequences.”
A number of countries, including the U.S., China, India and Brazil, have complained about the taxes at the U.N. climate negotiations and with the World Trade Organization. Complaints from the U.S. ring hollow considering its own arbitrary tariffs and its shirking of climate action. India at least has an argument, pointing out that high-income countries are historically responsible for the climate crisis. Other countries are more constructively developing emissions trading systems of their own.
Ultimately the world needs a global system with CBAM as a first step. We are all threatened by climate change and will all benefit from reducing emissions. According to Yale economics professor Matthew Kotchen, “If there is a global carbon tax, every time somebody purchases fossil fuels or carbon-intensive goods or services, they [will] have to pay extra for the environmental damages. Not only does the tax discourage polluting activities, it also provides incentives for research, investment, and deployment of more efficient and low emission alternatives. It is one of the most effective ways to reduce emissions.”
And we have a lot of emissions-reducing to do.