EU Proposes Using 25% of Border Carbon Tax Revenues to Support Industrial Decarbonization Strategies
The European Commission has introduced a significant reform proposal for the Border Carbon Adjustment Mechanism (CBAM), aiming to enhance climate action and industrial resilience.
Its dual objective is to strengthen the fight against carbon leakage and to allocate a portion of the generated revenues towards supporting the European industrial sector in its decarbonization journey. The proposal suggests that up to 25 percent of the income from this carbon tariff on high-emission imports could be used explicitly for industrial support measures.
CBAM, a key instrument of the European climate strategy, is designed to match the carbon costs paid by European producers with those incurred by imported goods from countries with less stringent climate regulations. Currently under a transitional phase since October 2023, the mechanism is set to fully operationalize in January 2026, gradually incorporating a CO2 price on imports such as steel, aluminum, cement, fertilizers, hydrogen, and electricity.
As free emission allowances decrease, pressure on European industries to bear higher costs will rise, potentially encouraging production outsourcings to countries with laxer climate policies. To counter this, the reform broadens CBAM to include certain processed goods with intensive steel and aluminum use, avoiding the risk of industry dislocation.
Brussels emphasizes that the revenues generated are primarily a climate policy tool, but anticipates increasing income from 2030 onwards as free allowances decline and border carbon costs become more embedded. A portion of these funds, potentially one-quarter, could be directed to modernize industry, promote technological innovation, and further emission reductions, aligning with the European Green Deal and Clean Industrial Deal.
Furthermore, the proposal enhances mechanisms against customs evasion and supply chain manipulation, addressing risks identified during the transitional period. It also adjusts import regulations for electricity, ensuring fair assessment based on the actual decarbonization level of exporting countries without unfairly penalizing renewable energy sources.
The European Commission argues that CBAM should incentivize third countries to adopt ambitious climate policies, while also supporting low and middle-income nations financially to help them adapt to new rules and transform their industries.
Following the proposal, negotiations will proceed between the European Parliament and the Council to finalize this pioneering reform aimed at balancing climate objectives with industrial competitiveness.