The EU’s Carbon Tax May Hurt Everyone

On 25th April, the EU parliament voted in favour of a new law: the Carbon Border Adjustment Mechanism (CBAM). The first-ever carbon border tax aims at reducing greenhouse emissions by 55% by 2030. The legislation means taxes being levied on imports to the EU and is part of a wider effort to bring the EU’s carbon market under stringent emissions standards.

While the intent of the law might be right, it assumes that the government is the best entity to save us from ourselves. Government intervention is often imposed on us on this pretext. It comes as an attempt to protect a nation from negative consequences, but instead creates new issues of its own.

The Impact of the Carbon Border Tax on EU

Scheduled to be phased in from 2026, the CBAM will affect several industries, including aluminium, iron and steel, fertilisers, cement, electricity, and hydrogen. The legislation might be expanded in future and affect even more industries.

The European economy is already in a tight spot. Battling the pandemic, euro-dollar parity and energy crisis have left deep scars. And now it has the Herculean task of bringing down inflation, while sustaining economic growth and ensuring financial stability. This may not be the right time to impost taxes that will hurt the economy.

Some may argue that the CBAM tax is estimated to generate up to €14 billion annually for the EU. Even then, there are always negative repercussions of taxes on an economy. Taxes are never a zero-sum game. Taxes on imports don’t just penalise foreign companies. They make it more expensive for domestic businesses to import materials.

According to the Global Trade Research Initiative (GTRI), starting January 1, 2026, the CBAM could translate to 20%-35% tax on certain imports into the EU. These taxes will cause rising carbon prices in Europe, putting pressure on businesses across the continent. This raises serious concerns around how manufacturers in the continent will remain competitive.

CBAM also adds more regulations for domestic businesses, as companies importing products from cited industries will need to buy certificates to cover their carbon footprint.

Taxes and regulations always reduce the incentive to produce and make goods more expensive for consumers. The last thing the EU needs right now is to dampen economic activity and add to inflationary pressures.

The Impact of the Carbon Border Tax on Other Countries

The CBAM has implications for India and other developing economies. In fact, the GTRI report goes so far as to say that it could “kill” trade with such economies. For Indian businesses, the EU is a major market. Around 27% of the country’s exports were accounted for by the EU in 2022, totalling a value of $8.2 billion.

The CBAM will lead to higher costs, lower demand and reduced competitiveness for Indian exporters. A major challenge is that India will need an Emissions Trading System (ETS) similar to that of the EU to demonstrate that the goods have been manufactured with low-carbon technologies.

I’m All for Protecting the Environment

Don’t get me wrong. I do believe pollution is a problem. However, CO2 emission is not the same as pollution. Carbon dioxide is part of nature and is used by plants. Even if CO2 increases significantly, it will not harm us.

Imposing taxes and regulations benefits no-one and ends up doing more harm than good. The much more effective way for governments to control pollution is by allowing private lawsuits. Damage awards via class action suits against polluters will encourage companies to take adequate measures to curb pollution.

Governments can also spread awareness, so that consumers make the right choices, steering industry in the right direction. Today’s consumers, especially the largest segment of Millennials and Gen Zers, already prefer businesses that fulfil their ESG responsibilities. A little push can get them to force carbon-intensive businesses to rethink their operations.

Imposing taxes to bring about change is never a good idea. The new carbon tax will not just impact countries that export to the EU but also businesses and customers in the bloc. Also, penalising businesses through taxes and regulations make them look for loopholes without bringing in the positive impact hoped for.