Europe’s carbon tax mechanism faces teething pains

Early glitches in Europe’s tool to tax pollution linked to goods made abroad underline the challenges of motivating companies worldwide to go greener.

Slow communication and technical difficulties have held up businesses’ compliance with the European Union’s new Carbon Border Adjustment Mechanism, which is designed to protect local producers against competition from countries with lower environmental standards. In Germany, less than 10% of companies have registered to the platform as of Feb. 28, according to people familiar with the matter.

Given the issues, the European Commission extended its deadline to submit reports for a second time — until the end of March — in an announcement made to member states this week, said the people, who asked not to be named as the details are private.

While the tool aims to level the playing field for domestic manufacturers of energy-intensive goods like cement and steel, it’s the latest example of energy transition policies adding layers of bureaucracy for companies. Officials want to prevent higher pollution outside the bloc as a result of the EU’s stricter climate change mitigation policies, but are facing growing pains to get the system up and running.

Software problems already led to a one-month delay of an earlier Jan. 31 deadline for importers to register for the mechanism. In Germany, where much of Europe’s manufacturing takes place, the authority in charge of implementing the new tool was only announced at the end of last year, giving firms a short notice to sign up.

Businesses are also uncertain which importers have to register for the tool, according to the people. While the European Commission said it will initially cover sectors that are at most risk of outsourcing carbon emissions — cement, iron, steel, aluminium, fertilisers, electricity and hydrogen — the scope is much wider: as many as 25,000 companies could be affected in Germany alone, said the people.

The commission is still analysing the exact numbers of importers that have to register, the people said. By mid-February, just over 11,400 reports had been submitted — mainly from Poland, Germany and Italy — with another 3,800 still in draft form. The commission plans to further improve the functions and open a stakeholder dialog next month, the people added.

That’s because downstream goods like screws also have to be reported, explained Dirk Jandura, president of the Federation of German Wholesale, Foreign Trade and Services. “It hits trading companies with not even 20 employees, and they are simply overwhelmed. They need more time for the whole thing to work.”

The EU’s Carbon Border Adjustment Mechanism works like a tariff, ensuring that the carbon price of imports is equivalent to the carbon price of domestic products. While payments are only due to start in 2026, companies have to start reporting the greenhouse gas emissions in their supply chain this year. The commission last month clarified there will be no penalties for non-compliance at this stage if delays are linked to technical errors.

A spokesperson for the commission didn’t immediately respond to a request for comment.

Roy Walsh

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