The EU’s 27 economy ministers reached an agreement on March 15th, 2022 to implement an import tax on goods produced in countries with lower environmental standards. The world’s first carbon levy on imports, known as the Carbon Border Adjustment Mechanism (CBAM), will work to influence global climate action while acting as a protectionist measure to prevent EU businesses from producing in non-EU countries with limited climate regulations, otherwise known as ‘carbon leakage’. By addressing carbon leakage, the intention is that companies globally will be incentivized to produce low carbon products. Moreover, it is anticipated that the CBAM will encourage foreign governments to introduce low carbon policies for industry in an effort to drive greenhouse gas reductions globally.
The CBAM will roll out to five sectors across the EU considered at high-risk of carbon leakage: iron and steel, cement, fertilizer, aluminum, and electricity generation. However, it is expected that the tax will eventually be rolled out to other products. As Canada works to meet its international commitments in relation to reducing the impact of climate change, the federal government has also been Exploring Border Carbon Adjustments for Canada since the fall of 2020. The federal government notes the following possible objectives of CBAM implementation:
- Reducing the risk of carbon leakage
- Maintain the competitiveness of domestic industries
- Supporting greater domestic climate ambition
- Driving international climate action
RCC will be monitoring policy and regulatory developments relating to the implementation of a carbon import tax as this could impact retailers who rely on materials and products produced in foreign countries.