1st carbon border tax is coming. What it means for the U.S.

E&E News
June 17, 2021
By Sara Schonhardt

The European Union is close to outlining its plan for the world’s first border tax on carbon emissions, and the effort has elicited a mix of inspiration, curiosity and concern among global leaders.

If it’s done right, the mechanism could have a real impact on the global fight against climate change, said policy experts. But there’s anxiety about how such a maneuver would affect the complex web of international commerce.

“This starts a serious conversation about how do we deal with these issues and what ways can we find,” said Brian Flannery, a visiting fellow at Resources for the Future. “It’s going to be very challenging.”

It may also be necessary.

“The current rules of global trade end up favoring dirtier producers, inefficient processes, in ways that are just not sustainable and not consistent with achieving a climate-stable future,” said Catrina Rorke, vice president for policy at the nonprofit Climate Leadership Council. “We have to confront that challenge if we are going to seriously approach solutions.”

leaked draft of the European Union’s plans suggests that leaders of the 27-nation bloc are looking to target carbon-intensive imported goods. Those include steel, aluminum, iron, cement, fertilizers and electricity.

Under the mechanism, mostly non-E.U. companies who want to sell those goods in the European Union would need to buy certificates that would be linked to the E.U. Emissions Trading System and based on E.U. carbon prices. The certificates would cover the carbon emissions embedded in the production of the goods.

The policy would apply to imports from countries that do not have a price on carbon, including the United States. Countries with a carbon price would be eligible for a credit from the authority that oversees the carbon border adjustment, according to the draft document.

The mechanism, which is expected to be officially released next month, is aimed at protecting European producers’ competitiveness against countries with weaker climate policies. It’s also meant to encourage other countries to put a price on carbon, said Shuting Pomerleau, a climate policy analyst at the Niskanen Center.

The European Union is undertaking pretty ambitious climate policies, and it’s why border carbon adjustments are part of the agenda, said Adele Morris, policy director for climate and energy economics at the Brookings Institution.

As carbon prices have increased over the past year, the European Union has come under pressure from its homegrown industries to enact a border tax to protect them from foreign competitors with higher emissions.

“Ideally, the United States would have an equally ambitious climate policy, and then there would be no need to border adjust,” Morris added.

Although the Biden administration has devised a towering agenda for tackling climate change — vowing to cut U.S. emissions in half by 2030 — lawmakers remain divided over climate policy and have yet to lay out a clear plan for how the nation will achieve its emissions cuts.

And despite Biden’s pledges, the United States still faces threats from faster-moving countries.

“The E.U. is definitely pulling ahead” compared with the United States when it comes to putting a price on carbon and thinking about embedded emissions in traded goods, said Pomerleau.

Under the European Union’s border tax proposal, neighboring countries such as Russia, Turkey and the United Kingdom likely would be the most affected, since the policy focuses on commodities that are often regionally traded, such as power and cement, said Johanna Lehne, a senior policy adviser at climate think tank E3G.

U.S. steel and aluminum exporters likely would be affected, too, but Lehne said she expects the impact to be low initially if the European Union maintains free allowances aimed at leveling the playing field for those sectors.

“This creates a window for the U.S. to put in place the pieces required to mitigate possible risks to producers,” Lehne added.

David Weisbach, a professor at the University of Chicago Law School who specializes in climate change and taxation, said he thinks the European Union’s border carbon mechanism would affect China and Russia more than the United States because of the low volume of trade in those sectors.

U.S. exports to the European Union of iron and steel were roughly $1 billion in 2019, less than 1% of the global iron and steel trade, according to resourcetrade.earth, a database on the natural resource trade developed by Chatham House. Aluminum accounted for $408 million in 2019 U.S. exports to the European Union, according to the database.

More broadly, the United States in 2019 exported $267.6 billion in goods to the European Union, led by aircraft, mineral fuels and machinery, according to the Office of the U.S. Trade Representative. The draft of the E.U. border adjustment plan suggests the focus is mostly on carbon-intensive primary goods rather than finished ones.

Weisbach said carbon border taxes likely would be a key element of future climate negotiations and that some kind of coordination is necessary if countries want to get it right.

“Ultimately, I think most supporters think of this as a way of creating an incentive for countries to negotiate and for countries that don’t have a carbon tax to want to have one,” he said.

A challenge or an opportunity?

As the plan moves forward in the European Union, it’s gaining more attention among U.S. officials.

U.S. climate envoy John Kerry said in March that he was concerned about the implications of a carbon border tax and asked the European Union to hold off (Climatewire, 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 properly.”

They would depend on a carbon price, however, which could be tougher to set politically.

In statements following recent summits, leaders of the Group of Seven nations, the European Union and the United States said they would work to address the risk of carbon leakage — a term used to describe the situation in which companies transfer production to countries with weaker climate standards, thereby driving up total emissions.

“This is the start of what hopefully will be multiple conversations and actions by the various countries,” said Jan Mares, a senior adviser with Resources for the Future.

Those conversations won’t be easy.

There are concerns, for example, around how a border carbon adjustment would be implemented. And there are worries that any such mechanism could run afoul of World Trade Organization rules that prevent countries from favoring certain trading partners, since it would apply to countries with carbon prices over those without them.

Pomerleau also worries that the E.U. 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 also will be pushback from the communities, unions and industries concerned about the impacts such a policy could have on them, Mares said.

As to who would be most affected, “the countries with stronger climate policies will get hurt if the countries with lesser climate policies are unresponsive to this proposal or push back on it,” said Flannery, who is working with Mares on border adjustment policies. “If everybody agreed to go ahead in the same way, you could sort out the winners and the losers, but I don’t think everybody is going to march to the same tune.”

Alternatively, it could be an opportunity for the United States to lead, said Rorke of the Climate Leadership Council. Recent research the group has supported revealed that U.S. industries, including steel, are more carbon efficient than their counterparts in other countries, giving them an advantage if a carbon border tax were put in place (Climatewire, May 26).

“If the European Union is the one to establish the rules of the game and figure out what this instrument looks like, it will be made in the image of their relatively convoluted Emissions Trading System policy,” said Rorke. “If the U.S. is in the driver’s seat, if we’re writing the rules, we have a chance to start from square one, a much better starting point for this kind of policy” (Climatewire, May 26).