New EU Carbon Emissions Tariff Will Significantly Impact Textile Imports to the EU
Image By Courtesy of PXhere
Climate change is a global problem that needs global solutions. As the EU raises its own climate ambition, and as long as less stringent climate policies prevail in many non-EU countries, there is a risk of so-called ‘carbon leakage'.
Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place than in the EU, or when EU products get replaced by more carbon-intensive imports.
The EU’s Carbon Border Adjustment Mechanism (CBAM) is our landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.
The gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry.
By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU's climate objectives are not undermined. The CBAM is designed to be compatible with WTO-rules.
Introduction Of The CBAM
The European Union (EU) starts the initial phase of its plan for the world's first carbon border tax this month, requiring importers to report the carbon dioxide (CO2) emissions of products sold into Europe, such as Textiles, or risk financial penalties.
The aim of the new regime is to prevent domestic EU industries from being undercut by more-polluting foreign competitors, while they invest in reducing emissions.
A carbon border tax under the Carbon Border Adjustment Mechanism (CBAM) is a proposed duty on imported goods that emit greenhouse gases (GHGs) during their production process.
The proposal is a part of the European Green Deal, a comprehensive plan approved by the European Commission in 2020 with the goal of making Europe the first climate-neutral continent by 2050.
Balancing Price and Pollution
Carbon border taxes have been introduced to deal with the increasing emissions from imported goods, which currently contribute to 20 per cent of the EU’s CO2 emissions.
It aims to create a level playing-field for EU businesses, which are already subject to the EU Emissions Trading System (ETS) which is a cap-and-trade system that sets limits on the total amount of greenhouse gases that businesses in the EU can emit.
Companies exceeding their emission limits must purchase allowances from companies that have emitted less.
The CBAM will impose a similar cost on imported goods, ensuring that EU businesses are not at a competitive disadvantage.
The Effect On Textiles
The EU’s CBAM is set to create significant repercussions for textile and garment exporters.
Under the CBAM, imported goods in the sector that emit greenhouse gases (GHGs) during production will be subjected to a tax.
As a result, selling textile and garment products in the EU will become more expensive for exporters, who will be responsible for paying the tax on the associated carbon emissions.
Many products in this industry are manufactured in countries with less stringent climate regulations, leading to higher emissions during production.
The carbon border tax could make it more costly for exporters to source products from these countries, further complicating supply chain dynamics.
The effects of this tax are being assessed, however some estimates put the impact of a Carbon Tax when added to airfreighted goods, as US$ 1.68 per item From Bangladesh to the UK. And US$ 2.65 per item from Bangladesh to the US East coast,
These are significant amounts and Importers will be well advised to study the tax impact in detail.
