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An EU Carbon Border Tax Could Be the Next Disruptive Force in Global Trade

A plan that is being considered by the European Commission to tax the carbon emissions attributed to imported goods could create competitive advantages for foreign companies with small greenhouse gas footprints—and have financial repercussions for other exporters, adding to the financial strain caused by the COVID-19 crisis. The tax could slash the profits that are generated by imported materials, such as crude oil, flat-rolled steel, and wood pulp, by 10% to 65%, and the tax could impact European Union and non-EU producers of such goods as chemicals and machinery, according to new research released by Boston Consulting Group (BCG).

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The study, which is described in an article titled “How an EU Carbon Border Tax Could Jolt World Trade,” found that an EU carbon tax on imports could rewrite the terms of competitive advantage in one of the world’s biggest markets. Higher prices for Russian crude oil, for example, could cause European chemical producers to import more oil from Saudi Arabia, where extraction methods leave a smaller carbon footprint. And steel that is produced in Chinese or Ukrainian mills using blast furnaces would become less competitive in the EU against steel from other countries that is made in more carbon-efficient mills.

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The details and timing of the policy are still to be determined and must be approved by legislators. But the article contends that some sort of carbon-pricing mechanism is likely to be imposed on imports—and companies should prepare.

“Whatever policy is adopted, the size and strategic importance of the EU market means its action could transform the fundamentals of global advantage,” said Johan Öberg, a BCG managing director and senior partner who coauthored the article. “Companies around the world will be compelled to manage their carbon footprints with greater urgency.”

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