MACF: a new carbon tax?

💲What is the carbon tax?

The carbon tax is a carbon tax instrument designed to reduce greenhouse gas (GHG) emissions by integrating the cost of GHG emissions into the price of goods and services.

Its main aim is toencourage businesses and households to reduce their dependence on fossil fuels, by charging them an amount corresponding to the GHG emissions equivalent to the carbon weight of the product or service consumed.

The carbon tax concept is based on the "polluter pays"principle: those who emit CO2 must bear the costs associated with their emissions, thus encouraging the adoption of more environmentally-friendly practices. There are several forms of carbon tax, applied to different economic sectors, and their implementation varies from country to country.

The Nordic countries (Sweden, Finland, Denmark and Norway) were the first to introduce a carbon tax in the 1980s. They also set carbon neutrality targets very early on, and opted to increase carbon pricing in the 1990s, which contributed significantly to the decline in their GHG emissions.

🇫🇷En France: carbon tax

In France, the carbon tax has been applied in the form of a carbon contribution, since 2014. It is known as the "Contribution Climat-Energie" (CCE).

Rather than a tax in its own right, it takes the form of the integration of a carbon component into existing domestic taxes: the domestic consumption tax on energy products (TICPE), natural gas (TICGN) and coal (TICC).

According to Benoît Leguet, director of a think-tank on the economics of energy transition, choosing whether to apply the carbon tax as a component or as a full-fledged tax amounts to the same thing. The price signal for consumers is the same. Prices rise, and households, businesses and organizations are encouraged to turn to other types of energy, which should cost less.

The CCE was introduced at €7/tonne of CO2 in 2014, rising to €30.5/tonne of CO2 in 2017. Since 2017, part of the revenue generated by this tax has been used to finance France's energy transition.

✊The acceptability of the carbon tax

As the carbon tax is directly reflected in the price paid by households, businesses and public authorities, it may be faced with problems of social acceptability, as it reduces their purchasing power. This was the case in France in 2018.

Another component can be transparency in the use of revenues generated. Justifying a tax can help make it acceptable.

When the Nordic countries decided in 2022 to increase their carbon tax and add carbon pricing through the European carbon markets (European Union Emissions Trading Scheme, EU ETS), accompanying measures were put in place to limit the impact on household purchasing power, along with targeted subsidies and partial tax exemptions for certain industrial sectors. These measures contributed significantly to the social acceptability of the carbon tax.

🇪🇺Pourquoi Is the European Union setting up the MACF?

The Border Carbon Adjustment Mechanism is a new European regulatory instrument whose aim is to subject products imported into the EU to carbon pricing equivalent to that applied to European manufacturers of the same product.

It is part of the European objective of achieving carbon neutrality by 2050. Member countries agreed on its necessity in 2021, and the final text was published on May 10, 2023.

The EU has already introduced internal measures, such as the Emissions Trading Scheme, to reduce GHG emissions. Under this system, companies are allocated a quota of authorized GHG emissions. Companies that exceed this quota must purchase allowances, and those that fall below it can sell their quotas.

The consequences of carbon pricing are :

• A loss of competitiveness for European companies in the face of international competitors who are not subject to such strict standards and whose production costs are lower.
• Lower demand for fossil fuels in the EU (since they are more expensive), which in turn leads to lower fossil fuel prices worldwide, encouraging their use.

If EU emissions fall, global emissions rise. This is known as carbon leakage: the relocation of GHG emissions elsewhere in the world, to countries with less stringent environmental regulations.

MACF is designed to address these concerns and enhance the competitiveness of European companies.

💶The MACF in practice

The mechanism works like this: importers in the EU will have to buy carbon certificates corresponding to the price of carbon that would have been paid if the goods had been produced in accordance with EU regulations.

In other words, whether the importer buys from within or outside the EU, the carbon price will always be included in the final purchase. The cost of importing is aligned with the cost of products manufactured in the EU, where companies are already subject to the EU ETS.

Conversely, if a non-EU producer demonstrates that it has already paid a price for the carbon used in the production of its products, the amount can be deducted for the EU importer. This helps to encourage global producers to decarbonize their production.

For the moment, the MACF covers the following sectors: steel, cement, aluminum, nitrogen fertilizers and hydrogen. These sectors are highly exposed to the risk of carbon leakage, and account for around half of industrial emissions in the EU.

The area of application will gradually be extended to other industries.

🛃A new carbon tax?

Although this instrument is often described as a Europe-wide "carbon tax", it differs from national carbon taxes in the way it is applied. Rather than a direct tax on GHG emissions within the EU, the mechanism acts as a border adjustment to ensure fair competition.

That said, it shares the fundamental objective of carbon taxes: to encourage the reduction of GHG emissions by integrating the environmental cost into the price of products. In this sense, the border carbon adjustment mechanism can be seen as an extension of carbon pricing efforts, this time applied at international level to cover trade.