COMMENT: What critics of a European ‘carbon border tax’ are missing

Published 20:07 on December 3, 2019  /  Last updated at 20:36 on December 3, 2019  /  Carbon Taxes, China, Climate Talks, Dialogue, EMEA, EU ETS, International, US, Views  /  No Comments

Opinions abound on a controversial new policy announced by new European Commission President von der Leyen: the ‘carbon border tax’. Yet many commentators limit themselves to repeating decade-old and often irrelevant arguments, overlooking the actual challenges such a measure will face.

By Michael Mehling, Harro van Asselt, Kasturi Das & Susanne Droege

A new European Commission took office this week. One of the measures the newly minted Commission President Ursula von der Leyen already announced early in her confirmation process, a European ‘Carbon Border Tax’ aimed at preventing the relocation of pollution, jobs and investment as a result of ambitious EU climate action, has incited heated commentary from a wide variety of observers. Most analyses, however, repeat well-worn and often dated arguments, and provide scarce new insight into how von der Leyen’s Commission might go about implementing such a measure.

Familiar anxieties that a border carbon adjustment – the more generic term usually applied to this type of measure – would first require sorting out complex legal questions under international trade law are again surfacing despite more than a decade of exhaustive analysis by legal experts, including the World Trade Organization’s own Secretariat. As we recently showed in an extensive review of relevant scholarship and case law in the leading international law journal, the legal questions are well-known and thoroughly discussed in the literature, with clear implications for the design and roll-out of a border carbon adjustment.

Commentators are also revisiting decade-old concerns about the technical and administrative challenges of determining the carbon footprint of imported goods. What they overlook is that every serious proposal for a border carbon adjustment discussed to date in Brussels has avoided the need for such a determination by relying instead on the average emissions of comparable domestic products. Not only does this approach circumvent the technical complexities and potential sensitivities of a product-by-product determination through European authorities, it also lowers the risk of foreign producers being discriminated vis-à-vis domestic producers in the eyes of the WTO.

A similar misconception is that border carbon adjustments will require tracing the supply chains of complex consumer goods such as cars and iPhones. But such goods will almost certainly not be the target of a European ‘Carbon Border Tax’: As we have highlighted elsewhere, past proposals have always focused on a very limited group of carbon-intensive basic goods that contribute the lion’s share of industrial emissions, such as steel and cement. Von der Leyen herself has hinted at such a limited scope by stating that the measure would ‘start with a number of selected sectors and be gradually extended.’ Using the approach described above, application of a border carbon adjustment can thus be as straightforward as multiplying the weight of an imported good by the average carbon intensity and emission allowance shortfall of the same good produced in Europe, a process that could be streamlined by linking the EU customs database and the European carbon market registry.

Finally, commentators like to warn about the diplomatic turmoil such a measure would unleash in the delicate relations with other countries. While they are right that unilateral action by the EU will be unpopular with affected trading partners, as early reactions from the United States and China confirm, they seem to ignore the radically altered political context in which this option is currently being discussed. Frequent parallels drawn to the inclusion of international aviation in the European carbon market and the fierce backlash that decision triggered fall short: At the time, trade relations were strong, and Europeans cautious about disrupting sensitive negotiations on what would eventually become the Paris Agreement. Now, we not only have an open-ended climate treaty, but unilateral U.S. action has set off a cascade of retaliatory trade restrictions that have deteriorated trade relations to a point not seen in decades.

Meanwhile, the commitment to dramatically increase EU climate policy ambition will only increase the cost burden on European industry, which is already smarting from a five-fold rise in carbon prices in less than two years. One way or another, free allocation – the main tool currently employed to protect domestic producers from international competition – will eventually hit a wall: it blunts the thrust of EU climate policy and can generate windfall profits as well as an incentive to expand production, all of which is incompatible with an ambitious decarbonization strategy. But it also has an in-built expiration date, because it is drawn from a fixed share of the rapidly dwindling European emissions cap.

A European ‘Carbon Border Tax’ – which, despite its name, is unlikely to take the shape of a tax and will probably be adopted through an extension of the European carbon market – offers a credible alternative. Still, its design gives rise to abundant real questions, such as: should it exist alongside free allocation, or should it gradually or immediately replace the latter? How can potentially affected trade partners be engaged in a fair and deliberate process that meets the requirements described in WTO case law and limits reputational damage? What should be done with the revenue levied through its application? And, perhaps most problematic, how can the EU compare the stringency of climate action faced by domestic and foreign producers to determine the level of adjustment and potentially differentiate between trade partners? These are the true challenges faced by a European ‘Carbon Border Tax’, and we should focus on resolving these rather than occupy debate space with obsolete and strawman arguments.

Michael Mehling is deputy director of the MIT Center for Energy and Environmental Policy Research (MIT CEEPR) and professor of practice at the University of Strathclyde Law School. Harro van Asselt is professor of climate law and policy at the University of Eastern Finland (UEF) Law School. Kasturi Das is professor of economics at the Institute of Management Technology, Ghaziabad, Delhi-NCR (IMTG), India. Susanne Droege is senior fellow with the global issues division at the German Institute for International and Security Affairs (SWP), Berlin, Germany.

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