EU countries call for "expansion" of carbon tax - Inclusion of many sectors would help repay Covid debt
Several major EU countries are calling for the carbon cap tax to be extended in the coming years to help repay over €300 billion in pandemic-era debt.
France, Italy and Poland are the biggest drivers of this change. They argue that the EU desperately needs new revenue and that a carbon border tax, which comes into effect for specific sectors in 2026, is a solution.
The tax will initially cover heavily polluting sectors such as steel, cement and aluminium, as well as electricity and hydrogen, with the aim of making imported goods pay a carbon price equal to EU standards. But the scheme, officially known as the Carbon Cap Adjustment Mechanism, also includes an integrated review by 2025 that will explore a possible expansion to other sectors and products.
Supporters are now seeing an opportunity with talks on the EU's next seven-year budget, which will determine how the bloc will repay the joint debt it took on in 2021 to stabilize an economy hit by the pandemic.
One of the plan's biggest supporters, Poland, currently wields a major influence over the EU policy conversation. The country will hold the EU's six-month presidency until July, and its EU commissioner, Piotr Serafin, will oversee the budget portfolio for the next five years.
Of course, an expansion of the Mechanism would cover only a small part of the EU's debt payments, which are expected to run between 25-30 billion euros per year, up to 20 percent of the bloc's current annual cash flow.
More money from the Mechanism
Austria, Bulgaria, Italy and Poland brought the Carbon Cap Mechanism back into the conversation in December, when they discussed an expansion of the scheme. There are three main ways to achieve this: It could be expanded to new sectors, changed to cover both exports and imports, or modified to include products produced from imports covered by the mechanism.
France is also one of the countries supporting the expansion. Many industries affected by the Mechanism also support the idea, fearing that failure to expand the measure could allow foreign companies to circumvent the tax.
But not everyone is convinced. More free-market countries fear that Donald Trump's administration will retaliate, even though the carbon tax applies to EU importers, not foreign firms. With the bloc on the brink of a trade war with the US, that would be a risky move.
The EU debt bomb
The problem is that the carbon border tax is one of the few across the Union that flows directly into the bloc’s budget. And with the Covid debt bill looming, Brussels needs new revenue streams. Failure to find a solution could have dire consequences for EU funds, from agricultural subsidies to defense.
The European Commission, the EU’s executive in Brussels, estimates that 75 percent of the Mechanism’s expected revenue, or 1.5 billion euros, would go to the EU budget. The rest would go to national governments. This is in contrast to other EU revenues, such as taxes on multinational corporations, which generate money for individual governments.
This means that expanding the carbon tax offers governments a way to raise more EU revenue without giving up their own funds. However, the carbon border tax cannot “cure” the bloc’s fiscal challenges.
The issue could come up next month when EU leaders gather in Brussels to discuss the bloc's next budget. The Commission will then present its budget proposal in July.
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