Following a good vote in the European Parliament, Ursula von der Leyen was confirmed last week as the next president from the European Commission.
In her efforts to win over green and progressive lawmakers, von der Leyen proposed several new, potentially far-reaching climate policies.
One of her most eye-catching suggestions would be a “carbon border tax”. Based on von der Leyen, this type of measure would need to be aligned with World Trade Organization (WTO) rules, and should gradually expand its sectoral coverage.
Her call was presented included in a “green deal” for Europe, including legislation to create a target of climate neutrality by 2050. She also suggests that the present greenhouse gas emission reduction target of 40% from 1990 levels by 2030 might be strengthened to 50% or perhaps 55%.
The main objective of adjusting for carbon costs in the border would be to avoid the relocation of carbon-intensive production to non-EU countries, a problem referred to as “carbon leakage”. When firms outsource production to avoid carbon costs, their emissions occur abroad instead, reducing the effectiveness of EU climate policy.
To tackle such leakage, the EU currently hands out free allowances to trade-exposed industries under its emissions trading plan (ETS).
Von der Leyen isn't the first to for border carbon adjustments. Within Europe, French president Emmanuel Macron has described the measure as “indispensable”, and also the French government has put forward concrete proposals in the past to incorporate importers within the EU ETS.
Across the Atlantic, 2023 presidential hopefuls like Joe Biden and Jay Inslee have also suggested imposing fees on carbon-intensive imports, an offer which has even found support among some Republicans.
Border carbon adjustments, which could take the form of a tax or tariff on imports and/or rebates for exports, have an edge over the current system of free allocation. Free allocation has resulted in windfall profits for industries and a distorted carbon price signal and it doesn't address the truth that imports can undermine the overall EU climate protection effort.
Beyond tackling carbon leakage, border carbon adjustments could pave the road for increased climate ambition by levelling the competitive arena. They are able to further exert political pressure on climate laggards, becoming a lever.
Yet for all the rhetoric about border carbon adjustments, the fact remains that no such measure has have you been adopted at a national level.
One from the primary concerns, which von der Leyen has acknowledged, is the chance of contravening international trade rules. Pressuring other countries to follow along with EU climate ambition may also result in political backlash, something the EU experienced first-hand some time ago, when it sought to extend emissions trading to international flights.
Carbon leakage can only be countered effectively if border carbon adjustments are carefully crafted. Von der Leyen and also the EU therefore have to design and implement the measure in a manner that balances environmental, trade law and fairness concerns. Summarising our conclusions from the recent multi-year study, we see five key features.
First, tthere shouldn't be rebates of the carbon costs to exporters. This might produce a perverse incentive to increase the carbon intensity of exports, and would undermine environmentally friendly results of the measure.
Second, the measure should be limited to primary goods, for instance cement, steel and aluminium, that ought to then no longer receive free allowances. These are trade-exposed sectors facing high carbon costs, and they have only limited capability to pass these costs right through to consumers. Targeting the sectors most vulnerable to carbon leakage strengthens environmentally friendly effectiveness of the measure, which improves its legal defensibility under WTO law. Country-level data of these commodities is increasingly available, and calculating their carbon footprint is a lot simpler than, for instance, those of products such as cars.
Third, WTO rules demand that border carbon adjustments do not discriminate among trade partners by singling out specific countries. Instead, the charge should be in line with the carbon content of products. The adjustment should further reflect the difference in carbon constraints between your imposing and targeted economies. Nevertheless there is therefore no among developed and developing countries on the basis of their historical contribution to global warming, exempting least developed countries from the border is through consistent with practices in both international trade and global warming agreements.
Fourth, the design and implementation of a border adjustment should occur via a deliberate procedure that ensures fairness, transparency and predictability to enhance political acceptance by trade partners and also the odds of passing legal muster.
Lastly, if successful, border carbon adjustments should become obsolete once producers that face this charge have ramped up their climate performance. Any border adjustment measure should therefore offer its very own expiration.
Even if these recommendations are followed, the street ahead for von der Leyen won' doubt be considered a bumpy one, and can put the EU's climate and trade diplomacy to the test.
However, properly designed and implemented through a fair and transparent process that engages trade partners, and offers revenue reimbursement to developing country exporters, border carbon adjustments can become a vital enabler to have an ambitious EU climate policy.
