Europe plans border tax on carbon. Will others join the club?
What happens when one trading power鈥� 鈥媔s trying to drive down carbon emissions, and other nations aren鈥檛 moving so fast? That鈥檚 a hot question for the European Union, which makes its heavily polluting industries pay for their pollution while 鈥媘any other countries don鈥檛.
Leaders in the EU have long argued that it鈥檚 time to level the playing field. Now they have a plan to use their market power to bring others into line鈥�.鈥�
The 鈥媝enalties they envision might have a side benefit for Earth鈥檚 climate by nudging other countries to ratchet down their own emissions.
Why We Wrote This
The COP26 global climate summit is, by design, about bargaining and voluntary steps, not mandates and penalties. But Europe is poised to add a tough-love tactic on the side. Will it help?
A key goal is to fix what is now a 鈥渓eaky鈥� system. Inside the EU, there鈥檚 a robust carbon market with rules and prices that push industries to reduce pollution. But goods imported from outside don鈥檛 typically face such constraints.听
The EU鈥檚 proposed answer is a carbon border adjustment mechanism (CBAM), effectively an import levy on carbon-intensive products. The proposal, released in July, forms part of a strategy to cut EU-wide emissions 55% by 2030. The goal is to incentivize companies to invest more in green technologies, both in Europe and overseas, by driving up the cost of polluting.
It鈥檚 an idea to drive market-based carbon accountability that could someday reach far beyond Europe. John Kerry, the White House special climate envoy, President Joe Biden wants to evaluate Europe鈥檚 CBAM and that the United States could deploy its own border adjustment tax.听
By going first, the EU may bring others along later, creating a club of developed economies that put a price on carbon and penalizing those that don鈥檛. That would speed up the clean energy transition that is essential to break the buildup of heat-trapping gases in Earth鈥檚 atmosphere.听
鈥淭here are a lot of people who see this as a way to build coordination among like-minded nations with similar levels of ambition who are ready to play by similar rules,鈥� says Christopher Kardish, an adviser to Adelphi, an environmental consultancy in Berlin.听
Such a club would reside outside the consensus-based, voluntary process at the United Nations climate conference in Glasgow, Scotland. Yet the CBAM is certain to be discussed on the sidelines, particularly between EU members and their trading partners.听
What exactly is the EU proposing to do?聽
From 2023, EU importers of industrial products such as steel, aluminum, and cement would start assessing and reporting their imports鈥� overseas carbon footprint: put simply, how much carbon was emitted to make the product. The next step in 2026 would be to tax the emitted carbon under the market price in Europe that domestic producers must pay.听
The idea is to prevent leakage, whereby strict standards in one jurisdiction cause production to shift to places with laxer rules. Already, around one-quarter of Europe鈥檚 emissions are embedded in the goods it imports, .听
鈥淢ore emissions are occurring in other countries to meet the demand [in Europe] for consumer goods,鈥� says Michael Mehling, deputy director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology. He notes that Switzerland now imports more embedded emissions in goods than it emits domestically.听
And European companies that are paying higher prices for carbon permits 鈥� hitting $70 per ton in October 鈥� don鈥檛 want to be at a competitive disadvantage to imports, says Mr. Kardish. 鈥淭hey鈥檙e facing a real bite in a world where they鈥檙e the only ones pricing carbon at that level,鈥� he says.听
Crucially, imports into Europe from countries that also price carbon would benefit under a CBAM. That鈥檚 because importers of steel, for example, made in California, one of several U.S. states that operate carbon markets, could deduct what was already paid there. Importers from countries that don鈥檛 tax carbon, however, would pay the full amount.听
What are the implications for international trade?聽
Europe鈥檚 CBAM could transform the market for carbon-intensive products. It may also help to turbocharge investment and innovation in greener ways of producing those products, either in Europe or other regions that run carbon markets. By contrast, countries that don鈥檛 tax carbon would be at a disadvantage in selling into the world鈥檚 richest economic bloc.听
Some critics question whether the CBAM is compatible with international trade rules, or represents a form of protectionism.
At the very least, a thorny question for EU regulators is what to do about countries that have policies to curb emissions, such as clean energy standards, but don鈥檛 put a price on carbon. In 2010, a bill to create a federal emissions-trading system like Europe鈥檚 failed to pass the U.S. Congress, and proposals to include a carbon tax in the Democratic social spending bill were dropped.听聽
鈥淚f it鈥檚 not an explicit price, either from a tax or a mandatory carbon market like California has, it鈥檚 not going to be a cost that can be counted鈥� toward paying a border tax, predicts Mr. Kardish.听
While many countries have introduced carbon markets, most emissions aren鈥檛 subject to caps and prices vary greatly. Studies have shown that only when carbon prices are sufficiently high do they lead to changes in investment and production that lower emissions. are currently covered by carbon markets.听
Could this be the basis of a new global approach to climate?聽
A European border tax that recognizes other countries鈥� emission markets would be a step toward creating a carbon-pricing club that runs parallel to U.N.-brokered emissions cuts. Proponents say this club could raise the climate ambition of other countries that aspire to join and funnel more investment into renewable energy to produce tradable goods.听
By penalizing countries that don鈥檛 put a price on carbon, though, an EU-led club could undercut the U.N. Framework Convention on Climate Change, which 197 countries have signed and is the basis of the 2015 Paris accord. Under that accord, countries effectively chose their own speed to cut emissions and build a low-carbon economy.听
Absent U.S. support, there may be doubts about the long-term effectiveness of such a club. Another question is how the EU cooperates with China, which recently launched an emissions trading market that only covers domestic power generators. Many wonder if China would want to join a club in which EU regulators are determining the basis of carbon pricing.
Such doubts won鈥檛 stop European policymakers from rolling out a CBAM, says Mr. Mehling, who notes that Germany鈥檚 incoming coalition government is bound to be supportive. 鈥淚t鈥檚 popular and populist: 鈥榃e鈥檙e doing what you elected us to do and we will hit anyone outside the country that鈥檚 trying to undermine it,鈥欌�� he says.听
