The European Union is set to present its plan for the world’s first border tax on carbon emissions, and the effort has sparked a mixture of inspiration, curiosity and concern among world leaders.
If done right, the mechanism could have a real impact on the global fight against climate change, political experts have said. But there is concern as to how such a move would affect the complex web of international trade.
“This starts a serious conversation about how we are dealing with these issues and what ways we can find,” said Brian Flannery, visiting researcher at Resources for the Future. “It’s going to be very difficult.”
It may also be necessary.
“Current world trade rules end up favoring the dirtiest, inefficient processes, in a way that is simply unsustainable and incompatible with achieving a climate stable future,” said Catrina Rorke, vice president of policies at the nonprofit Climate Leadership Council. “We must rise to this challenge if we are to seriously address solutions.”
A draft leak European Union plans suggest that leaders of the 27-country bloc seek to target carbon-intensive imported products. These include steel, aluminum, iron, cement, fertilizers, and electricity.
Under this mechanism, most non-European companies wishing to sell these products in the European Union would have to purchase certificates that would be linked to the EU Emissions Trading System and based on market prices. EU carbon. The certificates would cover the carbon emissions inherent in the production of the goods.
The policy would apply to imports from countries that have no carbon prices, including the United States. Countries with a carbon price would be eligible for credit from the authority that oversees the adjustment of the carbon frontier, according to the draft document.
The mechanism, which is expected to be officially released next month, aims to protect the competitiveness of European producers against countries with weaker climate policies. It also aims to encourage other countries to put a price on carbon, said Shuting Pomerleau, climate policy analyst at the Niskanen Center.
The European Union is undertaking some pretty ambitious climate policies, and that is why carbon adjustments at borders are on the agenda, said Adele Morris, policy director for the climate and energy economy. at the Brookings Institution.
As carbon prices have risen over the past year, the European Union has come under pressure from its local industries to enact a border tax to protect them from foreign competitors with higher emissions. high.
“Ideally, the United States would have an equally ambitious climate policy, and then there would be no need to adjust the borders,” Morris added.
Although the Biden administration has crafted an ambitious agenda to tackle climate change – promising to halve U.S. emissions by 2030 – lawmakers remain divided on climate policy and have yet to set a clear plan on how the country will achieve its emission reductions.
And despite Biden’s promises, the United States still faces threats from the fastest countries.
“The EU is definitely ahead” of the US when it comes to putting a price on carbon and thinking about emissions embedded in traded goods, Pomerleau said.
Under the European Union’s border tax proposal, neighboring countries such as Russia, Turkey and the UK would likely be hit the hardest, as policy focuses on commodities that are often traded in the country. regional level, such as electricity and cement, said Johanna Lehne, senior policy adviser at climate think tank E3G.
U.S. steel and aluminum exporters would likely be affected as well, but Lehne said she expects the impact to be small initially if the European Union maintains free quotas aimed at leveling the playing field. for these sectors.
“This creates a window for the United States to put in place the necessary elements to mitigate potential risks to producers,” Lehne added.
David Weisbach, a University of Chicago Law School professor specializing in climate change and taxation, said he believed the European Union’s border carbon mechanism would affect China and Russia more than the EU’s. United States due to the low volume of trade in these sectors.
U.S. iron and steel exports to the European Union were around $ 1 billion in 2019, less than 1% of global iron and steel trade, according to land resource trading, a natural resource trade database developed by Chatham House. Aluminum accounted for $ 408 million in 2019 US exports to the European Union, according to the database.
More generally, the United States exported in 2019 worth $ 267.6 billion in goods to the European Union, primarily planes, mineral fuels and machinery, according to at the office of the US trade representative. The draft EU border adjustment plan suggests that the focus is mainly on carbon-intensive primary products rather than finished products.
Weisbach said border carbon taxes would likely be a key part of future climate negotiations and that some form of coordination is needed if countries are to get it right.
“Ultimately I think most supporters see this as a way to create an incentive for countries to negotiate and for countries that don’t have a carbon tax to want to have one,” he said. he declares.
A challenge or an opportunity?
As the plan progresses in the European Union, it is gaining more and more attention from U.S. officials.
U.S. climate envoy John Kerry said in March he was concerned about the implications of a carbon border tax and called on the European Union to wait (Climate wire, March 15).
Last week, a State Department spokesperson Told The Wall Street Journal that Kerry recognized that border carbon adjustments could help advance climate action “under the right circumstances and if designed correctly.”
They would however depend on a carbon price, which could be more difficult to set politically.
In statements following recent summits, leaders of the Group of Seven, the European Union and the United States have said they will work to tackle the risk of carbon leakage – a term used to describe the situation in which companies shift their production to countries with a weaker climate. standards, thus increasing total emissions.
“This is the start of what will hopefully be multiple conversations and actions from different countries,” said Jan Mares, Senior Advisor at Resources for the Future.
These conversations will not be easy.
There are concerns, for example, about how a border carbon adjustment would be implemented. And there are fears that such a mechanism would violate World Trade Organization rules that prevent countries from favoring certain trading partners, as it would apply to countries with carbon prices over those that do not. do not have any.
Pomerleau also fears that the EU system looks more like an import tariff than a standard border adjustment, since it applies a tax on imports but not a rebate on exports.
There will also be a setback on the part of communities, unions and industries concerned about the impacts such a policy could have on them, Mares said.
As to who would be affected the most, “countries with stronger climate policies will be hurt if countries with less severe climate policies do not react to this proposal or push it back,” said Flannery, who works with Mares on border adjustment policies. “If everyone was okay with moving forward in the same way, you could sort the winners and the losers, but I don’t think everyone is going to keep pace.”
Alternatively, this could be an opportunity for the United States to take the lead, said Rorke of the Climate Leadership Council. Recent research supported by the group found that U.S. industries, including steel, are more carbon-efficient than their counterparts in other countries, giving them an advantage if a border carbon tax is put in place. (Climate wire, May 26).
“If the European Union is the one that sets the rules of the game and determines what this instrument looks like, it will be done in the image of their relatively convoluted emissions trading system policy,” Rorke said. “If the United States is in the driver’s seat, if we write the rules, we have a chance to start from square one, a much better starting point for this kind of policy” (Climate wire, May 26).