Brussels expects to raise nearly €10bn a year from a carbon tax on imports as part of its effort to tackle global warming and will use the money to repay hundreds of billions in EU joint recovery debt.

Details of the EU’s upcoming Carbon Border Adjustment Mechanism (CBAM) laid out in a legal text, seen by the Financial Times, reveals how the system will work. The so-called carbon border tax forms the cornerstone of Brussels’ attempt to protect European industry from foreign competitors that are not subject to the bloc’s stringent climate targets.

The documents show the mechanism will raise an estimated €9bn a year in revenues once it is fully up and running by 2030. The European Commission intends to introduce the tax gradually starting in 2023 to allow businesses a “transitional” period to adjust and ensure “the least burden possible on trade flows and trade operators”, the text noted.

European industry, particularly steelmakers, want the tool to come into force as soon as possible so they do not have to shoulder the burden of paying a rising EU carbon price while competitors outside the bloc do not.

The European Commission will next Wednesday unveil measures to help meet its goal of reducing average EU carbon emissions by 55 per cent in 2030, compared to 1990 levels. Alongside the CBAM, it includes a revamp of the EU’s carbon market, tougher CO2 emissions standards for cars, and proposals for an EU-wide kerosene tax.

Yet it is the CBAM that has provoked the most concern from the EU’s trading partners led by Russia which fear they will be worst hit.

The CBAM revenues have been earmarked to help cover the cost of the EU’s €750bn recovery fund, money Brussels has borrowed to support its members states to boost their economies in the wake of the pandemic. Although a relatively modest amount, the money has been championed by the European Parliament and countries such as France which want Brussels to generate its “own resources” to repay the recovery fund debt over the coming decades.

The money is likely to take on additional significance after the European Commission’s plans for an EU digital tax have been delayed because of concern from Washington that the levy is incompatible with ongoing negotiations for a global tax deal.

Countries without a national carbon price will likely face the steepest border tax

The CBAM has been championed as a way to prevent so-called “carbon leakage” where companies can move their operations outside the EU to avoid stiff climate regulations.

The tax would initially target a limited number of imports including iron, steel, cement and fertilisers. According to internal EU estimates, Russian businesses will make up a bulk of the revenues because of the high carbon intensity of their imports.

“As the EU increases its climate ambitions, the divergence with third countries’ level of climate action is expected to widen, with an increased risk of carbon leakage for the EU,” says the text.

Europe’s trading partners have warned the mechanism must not fall foul of World Trade Organization rules. EU officials say they are confident the tool will not risk retaliatory action as it is designed to target companies not countries and will only apply to nations that do not have equivalent carbon pricing systems.

The CBAM is also designed to complement a revamp of the EU’s Emissions Trading Scheme (ETS) where European industry pays a market-driven carbon price to cover the cost of their emissions. The commission has said it will phase out free carbon credits in the ETS for sectors such as aviation and then introduce the CBAM to protect businesses from rising costs and competition.

Officials said the final text is subject to change before it is adopted by the commission next week.

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