Last week, an agreement was reached in the EU on an important but little-noticed issue: the carbon tariff.

The carbon tariff, or carbon limit mechanism, imposes a fee on certain goods imported into the internal market from outside the EU. The purpose of the customs duty is to prevent carbon leakage, i.e. the transfer of production to countries where emissions are not limited.

The tariff will enter into force already in October 2023 and it will initially apply to iron, steel, cement, aluminum, fertilizers and electricity. After the transition phase, the customs are to be expanded so that by 2030 it would apply to all goods subject to emissions trading.

Customs works together with the EU’s emissions trading system. In practice, companies importing goods from outside the EU would have to pay an additional fee equal to what European companies pay for emission rights for production covered by emissions trading.

At the same time, the free emission rights subject to the carbon duty, which have been compensated for the competitive advantage of non-EU producers, will be removed from the EU emissions trading system. They will be phased out: by 2030, almost half and by 2034 all free emission rights.

The carbon tariffs have raised eyebrows among the EU’s trading partners. The US has been concerned about the impact on bilateral trade and China has repeatedly opposed the proposal.

Criticism has also come from Africa and other developing countries, which do not have as far-reaching ways of reducing their emissions as in developed countries. They consider themselves to be at a disadvantage.

Industry in Finland has mostly reacted positively to the carbon tariff. The economic research institute Etla estimated in the spring that the effects of customs on the Finnish national economy will be minor. The carbon duty would affect the import of iron and steel and fertilizers the most, especially from Russia and China. Etla estimates that, under normal circumstances, imports outside the EU could drop by a total of 25 percent.

According to Etla, carbon tariffs would benefit those companies that manufacture products subject to the tariff and those companies that produce intermediate products for companies benefiting from carbon tariffs. Other industries would suffer because production costs would rise.

“The EU continues to move forward in climate policy. There will certainly be more actions when the pressure to reduce emissions increases. Companies need to stay alert and not remain underdogs.”

The energy industry praised the decision, but pointed out that the fate of products exported from EU countries to other parts of the world is still open. Emission fees can weaken the competitiveness of products in the EU compared to products made elsewhere, which are not affected by emission fees.

Carbon tariffs also affect industry through the reduction of free emission rights and make companies perform harder. In Finland, the steel company SSAB has received the most free emission rights.

The EU continues to advance in climate policy. There will certainly be more actions when the pressure to reduce emissions increases. Companies should stay alert and not remain underdogs.