As part of efforts to become the world's first climate-neutral continent, the European Union is launching a border tax policy to drive climate action. 

Starting on Sunday, the new carbon border adjustment mechanism has begun the process to impose a tax on carbon-intensive imports. 

This measure is meant to ensure that European companies adhering to the EU's stringent climate regulations do not face unfair competition from producers outside the EU.

The first phase of the initiative is now underway, with importers from six carbon-intensive industries mandated to report their emissions. 

The policy is expected to have significant implications for businesses worldwide. 

The carbon border adjustment mechanism has encountered resistance from major EU trading partners like Russia and China, who argue that it contradicts the principles of free trade. 

Additionally, it has contributed to trade tensions between the EU and the US, prompting the Biden administration to request exemptions for steel and aluminium exports earlier this year.

In 2021, the OECD’s secretary-general Mathias Cormann urged caution over the new carbon-pricing ideas. 

The mechanism is set to serve as a test for the establishment of global carbon pricing in the fight against global warming. 

In the second phase, to begin in January 2026, companies will gradually face levies aligned with EU carbon market prices. As of Friday, the benchmark EU emissions contract stood at approximately AU$155 per metric tonne of carbon.

The idea of imposing emissions pricing at the European border has been discussed for two decades, but it only became law this year as part of the EU's ambitious green initiative. 

The EU has committed to reducing greenhouse gas emissions by at least 55 per cent this decade compared to 1990 levels and achieving climate neutrality by mid-century.

Even before the introduction of taxes, the transitional phase of the border mechanism should compel exporters to focus on reducing their carbon footprint. This is likely to affect their competitiveness in the market, potentially leading to a shift of carbon-intensive products to countries outside the EU without carbon tariffs.

The levy can be partially waived if a carbon tax has already been paid in the country of origin, encouraging other nations to implement their own green policies. This design also prevents the mechanism from being considered an illegal tariff under World Trade Organization regulations.