From 2026, importers of cement, iron, steel, aluminum, fertilizers, electricity and hydrogen from outside the EU will have to pay a carbon tax, known as EU's carbon border adjustment mechanism (CBAM). It is also planned to tax these goods when they are parceled from third countries and the charge exceeds €150.

"We can stripe down what nobody orders in a package, namely electricity. I am assuming that fertilizers are the primary focus here. If you order it from outside the EU, the company that sells it to the European customer must pay the same carbon fee at the border," Vivian Loonela, head of the European Commission Representation in Estonia, explained.

According to the proposal, the tax will be applied to products ordered from third countries for more than €150. The permanent secretary of the Ministry of Climate, Keit Kasemets, said that it was not yet known who will pay the levy, but this makes goods more expensive for end consumers, as the objective is to bring the price of EU-made products to parity with those made in third countries.

"Today, for example, an Estonian manufacturer of fertilizers has rather high environmental duties, and so another company producing the same product in a third country is more competitive. This is the problem that is being addressed," Kasemets said.

Also, introducing a carbon tax at the border is essential to meet climate targets.

"If we only address so-called environmental charges and carbon taxation within the European Union, we will wind up in a situation where production elsewhere in the world is still possible, albeit in a more polluting manner. The effect on the climate would be the same," he went on to say.

The gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonization of EU industry. 

The CBAM will ensure that the carbon price of imports is equivalent to the carbon price of domestic production by confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU.

The carbon tax is equivalent to the European Union's carbon quotas.

Kasemets said that the carbon tax has an impact on enterprises' supply chains. This is being discussed by the ministries of climate and finance.

"We aim to establish a system in which the conditions for competition are in place and the influence on supply chains is such that companies that employ more imported items could continue to compete."

Kasemets said that the Ministry of Climate has started a mapping exercise to find out how many companies outsource taxable materials from third countries to Estonia.

"The impact in terms of the number of enterprises affected by this approach is minimal. In Estonia, we are talking about 200 businesses. We have not identified the individuals who will buy these things from third countries, but the number is unlikely to be large."

The CBAM will enter into force in its transitional phase as of October 1, 2023. It will initially apply to imports of certain goods whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.

CBAM will eventually – when fully phased in – capture more than 50 percent of the emissions in ETS covered sectors.

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