Carbon footprint: taxation of products for entry into the European Union

Each citizen has their own mechanisms to verify that climate change has arrived and will intensify in the future. It was not for lack of warning from scientists, who have drawn attention to the growing anthropogenic emissions of greenhouse gases (GHG) for more than 50 years, and their impact on the planetary climate. The warnings did little good. Due to the inaction of governments and economic sectors in recent decades, governments have sought public policies that can mitigate the announced disaster.

Background in the European Union

In the case of the European bloc, we need to go back to 2019 to understand the current context. That year, the European Commission formulated the European Ecological Pact (bitly.ws/zDTs), establishing a backdrop for sustainable development, one of the justifications being that economic growth implied progressive decarbonization. In addition to actions that directly involve production in the bloc's countries, the Pact points to actions such as avoiding the import of products that originate in recently deforested areas and the application of taxes on emissions when products manufactured from other countries are introduced.

Consider that the climate issue is one of the pillars of the European Ecological Pact. In July 2021, the European Climate Law was approved, which establishes the goal of reducing at least 55% of GHG emissions by 2030, compared to 1990 levels, as well as approving the goal of emissions neutrality by 2050, a greater objective of the Paris Agreement.

The Climate Pact and Law are at the genesis of one of the most controversial programs, called “Carbon Adjustment Mechanism at the European Union Border”, known as CBAM, for its acronym in English (bitly.ws/zDQE). To this end, mechanisms will be created to measure the carbon footprint in the production process of imported goods (life cycle analysis), imposing a fee for the product to enter EU countries, based on the volume of emissions generated in the production of the imported quantity. . This process is very complicated. The different segments of the economy have mandatory emissions reduction targets, including participating in the Emissions Trading System (SCE).

It should be noted that European carbon emissions trading began in 2005. Its logic is the system known as “cap and trade”. Through it, emission licenses are granted to industrial and energy generation installations, which represent more than half of the EU's GHG emissions. For example, if the company emits more carbon than the license quota received or purchased from third parties (cap), it must cover the difference by purchasing emission licenses from companies that have emitted GHGs lower than the value legally attributed to them (trade). .

In the European Union, segments with emissions reduction targets include the generation of electricity, steam and heat, and energy-intensive industries. This last segment involves oil refineries, steel mills and the production of iron, aluminum and other metals, cement, lime, glass, ceramics, cellulose, paper, cardboard, acids and organic chemicals in bulk and aviation, among others.

The CBAM

The sectors mentioned above are covered by the legal obligation to reduce emissions. To this end, each company is granted a “license to issue”, establishing the maximum value of this issue. If this limit is exceeded, the company is obliged to compensate for emissions beyond the license, by purchasing carbon credits on the market.

It turns out that this system imposes a financial burden on companies located in the European Union. To offset the extra cost, and in order to avoid importing products not subject to similar emission reduction measures in other countries, the CBAM mechanism was created. The climate objective is to maintain the economy’s decarbonization goals. The economic objectives are to avoid competition from cheaper foreign products (as they are not subject to decarbonization rules), or even to avoid the deindustrialization of the EU, with the transfer of factories to countries that are lenient with GHG emissions.

Therefore, the implementation of the mechanism will be gradual, starting with the most emission-intensive products. In the first phase, products such as cement, aluminum, fertilizers, iron, steel and the production of electricity will be taxed. It appears that, in the first stage, agricultural products will not be directly covered. However, inputs and equipment used in the agricultural production system (fertilizers, pesticides, machines and implements) will be subject to taxation, which impacts the production cost of European agriculture.

The gradual implementation provides a period of time for the Brazilian government, and the private sector, to analyze the impacts of CBAM on exports of Brazilian products, making the necessary adaptations to maintain the flow of exports to the European Union, under the validity of the new mechanism. .

By Décio Luiz Gazzoni, Embrapa Soy