E.U. Set to Unveil First-Ever Carbon Border Tax

Europe is about to shake up the global trade network—all in the name of climate change. The European Union is scheduled this week to release its plan for a carbon border adjustment—basically a fee on planet-warming carbon embedded in goods…

Europe is about to shake up the global trade network—all in the name of climate change.

The European Union is scheduled this week to release its plan for a carbon border adjustment—basically a fee on planet-warming carbon embedded in goods produced outside the 27-member bloc.

The E.U. border tax—which would be the first of its kind in the world—is part of a package of 13 different climate policies set to be unveiled tomorrow.

Its intent is twofold. The tax is designed to help the E.U. meet emissions targets enshrined in a new climate law. And it’s supposed to protect E.U. industries from overseas competitors less constrained by climate regulations.

Not surprisingly, the plan has attracted global interest since a draft was leaked early last month. The E.U.’s trading partners will be watching closely to see if the border tax is designed to reduce emissions and can survive accusations of protectionism, which could rub up against the World Trade Organization’s regulations.

If the E.U. tax is well-received, it could set the standard for similar border adjustments. If not, it could inflame global tensions over international commerce.

Part of the issue is the obligations and policies that nations have undertaken to address climate under the Paris Agreement. They differ vastly in ambition in a way that will affect international trade, said Brian Flannery, a visiting fellow at Resources for the Future.

“By highlighting it now, they’re really calling attention to the fact that we have to find a way to round this problem,” he said.

The carbon border adjustment would be tied to Europe’s Emissions Trading System, which puts a price on carbon to incentivize companies to reduce their emissions. A border adjustment is a way to ensure a level playing field between imports and exports and prevent what’s known as carbon leakage—when companies move their production to places with less stringent emissions standards or when they lose market share to more emissions-intensive competitors.

A leaked draft of the E.U.’s plan suggests that mostly non-E.U. companies that want to sell carbon-intensive goods in the European Union would need to buy certificates based on E.U. carbon prices. The certificates would cover the carbon emissions embedded in the production of the goods (Climatewire, June 17).

The policy would apply to imports from countries that do not have a price on carbon, including the United States. And that raises concerns that it could run afoul of WTO rules that prevent countries from favoring certain trading partners.

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China, South Africa, Brazil and India expressed “grave concern” in a joint statement following a meeting in April over the imposition of trade barriers seen as discriminatory.

Ahead of a meeting among finance officials from the Group of 20 over the weekend, U.S. Treasury Secretary Janet Yellen said the United States welcomed discussions on policy levers for addressing carbon leakage. But she argued that any carbon border adjustment system should “focus on the degree to which a country’s climate policies reduce emissions—and hence carbon content—rather than focus only on explicit carbon pricing” (Climatewire, July 12).

It’s not surprising the United States would take such a stance, said policy experts. That’s because the U.S. doesn’t have a carbon price and would not benefit from a policy that offers credits based on carbon pricing—even if producers are subject to stringent production standards.

“It’s one of the most unbridgeable and challenging issues in this border carbon adjustment debate,” said Christopher Kardish, an adviser on carbon markets and pricing at the Berlin-based think tank Adelphi. “There are a lot of questions around how the U.S. would do a border carbon adjustment, especially in the absence of a carbon price.”

Greg Bertelsen, head of the Climate Leadership Council, a bipartisan research organization that lobbies for a carbon price, said he believes the Biden administration and U.S. lawmakers are starting to more deeply explore the idea of a border adjustment tax but are in the early stages of assessing the best approach.

“The increased attention globally around border carbon adjustments has captured the attention of lawmakers on both sides of the aisle,” he said.

While the concept of a border carbon adjustment isn’t new, the E.U. is the first jurisdiction to move forward with it, so it’s igniting a lot of interest about what the impacts and the design should be, said Catrina Rorke, vice president of policy at the Climate Leadership Council.

She said she anticipates the E.U.’s policy may roll out in the form of a pilot project that will be adapted and revised over time.

There are potential upsides.

Putting a fee on imports could compel major trading partners such as China to speed up their efforts to reduce emissions in heavily traded sectors like steel and aluminum, said Lina Li, a senior manager specializing in carbon markets at Adelphi.

Conversely, it could lead them to shuffle their resources, sending products that are made with fewer emissions to Europe and those with higher carbon footprints to countries with weaker climate protections, according to a report she co-authored.

Kardish, of the Adelphi think tank, said the mechanism could push countries in the E.U. region, such as Russia and Turkey, toward carbon pricing. The question will be whether it can survive diplomatically or whether it could achieve the same ends through potentially less coercive means, he said.

Li said the E.U. should engage with its trading partners in the coming months and help educate them about how the border adjustment tax would work.

Even if the economic impacts of the E.U.’s border adjustment are modest, the mechanism marks a “turning point” in how countries deal with decarbonization, said Michael Mehling, deputy director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology.

“At the very least it starts a conversation on the need in these coming decades to increasingly align on ambition and issues like the carbon that we send in our trade to other places,” Kardish said.