The EU and US dip into a carbon trade fight

Washington Examiner
July 15, 2021
By Josh Siegel

The European Union rolled out a plan this week to impose “climate tariffs” against countries that lack aggressive emissions-reduction policies, potentially presaging a trade conflict that could complicate the fight against global warming.

Not to be outdone, Senate Democrats as part of a sprawling $3.5 trillion infrastructure and climate spending plan this week pledged to impose a “polluter import fee” on exporters of carbon-intensive goods, though it is far less detailed than the EU’s plan.

Taken together, the moves show that government leaders are embracing mixing protectionist trade policy with combating global warming, an issue that requires international cooperation to address.

“Depending on how it evolves, you could have a situation where this could undermine the possibility of forming a carbon club between the U.S. and its allies,” said George David Banks, an international climate adviser to former President Donald Trump who is now a fellow at the Bipartisan Policy Center.

In releasing details of its long-anticipated carbon border adjustment, the EU ignored warnings from White House climate envoy John Kerry who said in March that such an import tax should be a “last resort” that could inflame tensions ahead of pivotal United Nations climate negotiations in November.

The Biden administration has since pivoted to accept the inevitability of the EU’s move and acknowledge that it could be helpful in prodding high-polluting countries such as China to boost its climate mitigation efforts.

Treasury Secretary Janet Yellen said during meetings with EU officials in Brussels this week that exporters from countries such as the U.S. that are regulating carbon dioxide emissions should be credited in some way.

The EU, however, has not committed to exemptions, and it’s unclear whether the bloc will consider the Biden administration’s pledge to cut emissions in half by 2030 to be credible since meeting that target is contingent on Democrats in Congress passing sprawling infrastructure legislation.

Europe is further along with its policies, having an emissions trading scheme since 2005 while committing under the law to cut emissions 55% by 2030 from 1990 levels. The U.S, by contrast, has not imposed an economywide price on carbon, and the Biden administration is not prioritizing that policy as it favors a mix of clean energy mandates and tax subsidies.

“A well-designed border carbon adjustment coupled with a carbon tax is a good policy, but if the EU has a certain design based on its emissions trading scheme and the U.S. is trying to respond with an undefined carbon tariff, I am concerned there would just be trade wars,” said Shuting Pomerleau, a Niskanen Center climate policy analyst.

From the EU’s perspective, imposing a matching border carbon adjustment with a domestic carbon price is essential to avoid harming the competitiveness of European industries. If exporters of carbon-intensive goods such as steel, aluminum, cement, electricity, and fertilizer have to pay a fee equivalent to the same price per metric ton of carbon as the EU’s emissions trading market, it would remove the incentive for companies to move overseas to avoid paying the domestic fee.

“The Europeans are ahead of the game,” Pomerleau said. “The EU is under tremendous pressure from domestic industry to level the playing field.”

The EU is also aiming to prod the bloc’s trading partners to adopt carbon pricing systems or other aggressive climate policies.

“The best border adjustment is one you don’t have to use because it induces the policies you want,” said Nat Keohane, president of the Center for Climate and Energy Solutions. “The ultimate goal is not to raise prices on imports and penalize other countries, but create incentives for cooperation.”

With that in mind, the EU is giving trade partners time to adjust, requiring importers to begin monitoring and reporting the carbon content of imported products in 2023 and start paying in 2026.

That lag could benefit the U.S., which has an advantage over China, India, and even Europe in producing goods and services at lower rates of carbon emissions, including steel, according to research from the Climate Leadership Council.

“If we are looking at the relative carbon intensity of U.S. production, our manufacturers are exceptionally clean and well positioned to compete on the basis of carbon intensity,” said Catrina Rorke, the group’s vice president for policy.

Countries nearer to the EU would be more affected, including Russia, Turkey, China, the United Kingdom, and Ukraine, which export large amounts of industrial products to Europe.

Some of these countries could mount a challenge to the EU’s new rules under the World Trade Organization, but experts don’t expect the U.S. to join that fight.

“The EU will implement the scheme in a transparent, nondiscriminatory way. Therefore, it should be WTO compliant,” said Pierre Noel, a global research scholar at Columbia University’s Center on Global Energy Policy. “The risk is that the U.S. sides with the least progressive countries in the world, in terms of climate policy.”

In the meantime, Democrats in Congress and the Biden administration could struggle to impose its own border carbon adjustment if they don’t pass a domestic carbon tax or a similar pricing scheme on domestic goods.

One problem with doing a border carbon adjustment without a carbon tax relates to accounting. If the U.S. set a carbon tax starting at $50 per ton, for example, the U.S. could simply tax imported goods equivalently.

But without such a point of comparison, it would be difficult to come up with a fair rate to tax imports.

“It does feel the U.S. Congress is putting the cart before the horse by having some sort of border carbon adjustment before we have the internal carbon mechanism in place,” Keohane said.

Because the U.S. does not impose an explicit cost of carbon but instead relies on a patchwork of regulations and tax subsidies to reduce carbon pollution, the Biden administration would need to find a way to calculate and convert those regulations into an equivalent number of emissions associated with products.

“From the administrative perspective, it would be a daunting task,” Pomerleau said.

Pomerleau and Keohane also noted that the top climate policy priority of Joe Biden and Democrats, a clean electricity standard , only applies to the power sector, which accounts for less than 30% of U.S. emissions, and is not economywide like a carbon price.

The U.S. does not import much power from other countries.

“I would imagine a scenario in which trading partners would say that is only one sector-specific standard,” Pomerleau said.

Paul Bledsoe, a strategic adviser at the Progressive Policy Institute, argued that Democrats could justify carbon tariffs if the party passes a mishmash of clean energy tax subsidies and regulations as part of its infrastructure plans.

“This notion you need a carbon tax to impose border tariffs is untrue on its face,” said Bledsoe, a former climate change adviser in the Clinton administration. “If the Biden administration and Democrats are successful in rapidly decarbonizing the U.S. economy this decade, we should be in position to impose carbon tariffs on China and other nations more carbon-intensive than us. I see no technical impediment to that.”