A carbon trade war is brewing across Europe. The EU is expected to announce a charge for imported goods based on carbon content this summer. Local industries that rely on imported materials such as aluminium would suffer. Most of the burden would fall on exporters such as Russia.

Putting pressure on countries to mitigate carbon emissions via a carbon border adjustment mechanism (CBAM) chimes with broader climate change initiatives. But it also smacks of a revenue-raising scheme. The charge may be seen as a way to boost funding for the EU’s pandemic recovery.

Under the EU’s current emissions trading system, emitters receive free carbon allowances. The new scheme appears designed to run in parallel with other EU plans to accelerate emissions cuts. The latest target would slash output to 55 per cent below 1990 levels by 2030. Previously, the target was 40 per cent.

No surprise that EU industries have complained. Reduced allowances combined with tougher commitments mean heavy industries such as steel and cement will have to buy even more carbon credits at rising prices. The credits trade at about €50 per tonne. Heavy carbon emitters face large implied liabilities. HeidelbergCement, for example, reported emissions of 77mt of carbon in 2019.

Among the sectors that could pay more, two stand out, according to Morgan Stanley. European aluminium and fertiliser makers both rely proportionally more on imported raw materials than other industries. The EU also imports considerable amounts of steel, fertilisers and cement. Much of that comes from Russia, Turkey and Ukraine. When CBAM begins, the scheme could raise perhaps €1bn a year. Half of that figure could come from Russia.

The total looks paltry next to the financing needs for the EU’s €1.8tn stimulus plan. It is also unlikely to start soon. Even from 2023, a transition period would follow. It is unlikely to be fully implemented until 2030. Until then expect fierce negotiations. In the near term, CBAM may generate nearly as much hot air as it aims to reduce.