Opinion: EU Should Use Carbon Credits As The Carrot To Counteract The Stick Of Carbon Border Tax

Opinion: Eu Should Use Carbon Credits As The Carrot To Counteract The Stick Of Carbon Border Tax - Carbon Herald

by Seb Cross, co-Founder and Chief Innovation Officer of BeZero Carbon

It is human nature to be wary of those things that have let us down in the past. ‘Fool me once’ is a refrain that seems to capture the EU attitude towards carbon credits—a relic stance that finds its origins in the ‘carbon panic’ sparked by the collapse in confidence in the original Clean Development Mechanism (CDM) of the early 2000s. 

Add to that the last two years’ heated debate over the integrity of carbon credits, and European scepticism towards them seems almost insurmountable, despite the evidenced potential of climate projects.

While headlines suggest carbon projects continue to be dominated by shortcomings, the underlying (and largely untold) story in the voluntary carbon market (VCM)—the primary ecosystem for carbon credits— is one of innovation and evolution.

From independent carbon ratings that measure risk, to carbon insurance and measurement tools, the intelligence available in the market to discern quality of carbon projects has never been greater. 

Despite this, we have seen slow progress on governments realising the potential of high-quality carbon projects in compliance markets. BeZero Carbon’s recent research showed that integrating credits into just the EU and UK emissions trading schemes (ETS) could unlock up to $11 billion in climate finance between now and 2030.

CBAM: the new carbon tool in town

But now there’s a new carbon pricing tool in town—the EU’s carbon border adjustment mechanism (CBAM). By taxing imports into the EU based on their carbon intensity, the CBAM removes the competitive disadvantage domestic producers face by paying for their carbon emissions through the ETS. It also enables the EU to have a huge influence in seeing carbon emissions priced globally. 

I saw this first hand recently in a visit to the MENA region, where companies who had scarcely heard of a carbon footprint a few years ago are now busy calculating the carbon intensity of any products they are selling to the EU and devising strategies to manage this new liability. 

Relevant: UK Plans To Introduce Carbon Border Tax In 2026

CBAM prices the carbon emissions of imports into the EU in two ways; either the importer shows that they have paid an equivalent carbon price elsewhere in the supply chain, or they must pay the carbon price to the EU. Faced with a choice between collecting this tax revenue themselves or losing it to the EU, many governments that do not currently impose a carbon tax domestically will likely consider doing so now. 

This measure is undoubtedly a win for the climate. But the economic equality of it is more contentious. 

The carrot versus the stick

While domestic emissions have fallen in the EU since 1990, consumed emissions have remained flat. In other words, the EU has seen much of its carbon-intensive production, of goods consumed by the bloc, move abroad. This outsourcing of production has driven up living standards in countries like China and India, through the rapid expansion of manufacturing industries. The CBAM risks undoing some of these socioeconomic benefits, through carbon tax revenue being diverted to the EU and jobs lost in developing countries. 

Carbon credits should be the carrot that counteracts the CBAM stick. Compared to the bluntness of a carbon tax, allowing importers to use the carbon market to manage their CBAM liabilities would channel financing to a wide range of decarbonising activities. 

From the company’s perspective, integrating carbon credits into the CBAM opens up affordable decarbonisation. Let’s say a steel producer is importing to the EU—it can either pay the carbon tax or look to decarbonise its steel production. The technology to do the latter is prohibitively expensive, in some cases, and nascent. 

Relevant: India Attempts To Mitigate Harm On Local Companies From EU Carbon Border Tax

Instead of losing the carbon taxation to either its own government or the EU, the steel producer could instead purchase high-quality carbon credits against this liability. Now the company can fund meaningful climate action—measurable using the market’s innovations—that won’t bankrupt it, and divert capital towards the parts of the world where it will make the biggest impact.

Markets are much more effective and efficient than taxes when they work. So the question that demands our attention must be: how can we rebuild trust in high-quality credits as effective instruments of climate action, so that integrating them into the CBAM is a fairer—and indeed more efficient—solution than an equivalent carbon tax? 

The answer lies in recognising the market as it stands today; the ecosystem has come a long way in the last ten years, and developed tools and guardrails to demonstrate what genuine climate action looks like. In acknowledging this direction of travel, the EU could seize an opportunity to make the CBAM a fairer mechanism for financing climate action.

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