How the EU carbon tax comes into play

The European Emission Trading System (ETS) currently hands out emission allowances mostly for free, mainly to prevent local industries from moving abroad – carbon leakage. It only prices emissions from continental production (scope 1) when these exceed the “cap”.  This means that raw material producers are only taxed on marginal emissions which, from a policymaker’s standpoint, diminishes the polluter’s incentives to meet the urgent climate goals.

 

From 2026, these free allowances will be replaced by auctioned ones in the EU ETS, and companies will face charges on a progressively larger portion of their continental (scope 1 through the EU ETS) and imported (scope 3 through CBAM) greenhouse gas emissions being taxed.

The auction price of the EU ETS and CBAM certificates itself is also set to significantly increase due to an expected larger demand for emission allowances. In fact, 2023’s most reputable financial projections on the allowance price have all been largely exceeded.