The heads of state and government of thepropose introducing a “carbon border adjustment mechanism” from 2023, to charge imported goods according to the CO2 emitted during their production. At their recent summit, they decided to use the ensuing revenues to boost the ’s budget. This gives a fiscal twist to an instrument actually designed for policy.
Ursula von der Leyen, the president of the introduce a “carbon border tax” as part of her European Green Deal. In spring 2020, the commission launched a roadmap process to prepare concrete legislative proposals by 2021. Its proposal also responds to fears that higher European costs caused by EU emissions trading ( ) could cause companies to relocate activities outside the union, causing carbon leakage., had already announced in 2019 that she would like to
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Outsourcing would contribute to reducing European emissions, but not to tackling the global problem. To date, thehas addressed the risk of relocation by allocating free emission allowances to sectors at risk of carbon leakage. A border adjustment could create an alternative with a global impact.
There is rising support for the idea, after years of resistance from many implement the 2015 Paris Agreement. When designing the instrument, it will be important to comply with ( ) rules and to get important trading partners on board.states and business associations. And the pressure is set to grow, with an increase in the EU’s climate target for 2030 — and anticipated higher costs for EU businesses — expected this fall. Furthermore, a border adjustment for foreign products will be widely interpreted as a clear message, especially to Washington and Beijing, that the intends to
implemented: “a carbon tax on selected products, a new carbon customs duty or the extension of the to imports.” From a trade law perspective, any of these options could be designed in accordance with rules. The crucial aspect is the principle of non-discrimination: that a border adjustment must not differentiate among like products or between WTO members. If it were necessary to depart from the principle, for example, where a trading partner or individual company is able to demonstrate that it is already taking care of emissions reductions, the rules for exceptions would need to be observed.proposes three ways in which a “carbon border adjustment mechanism” could be
An EU-wide“product tax” and its implementation by the states would be the most straightforward approach from a trade law perspective. To do this, the would first have to levy a tax on goods manufactured in the . Then, it would be unproblematic to apply this tax to imports as well — the value-added tax, for example, follows this approach. Imported “like” products would be treated the same way as domestic products, which is -compliant.
Extending theto industrial imports would be more complex. The task for the European. would be to demonstrate that under trade law, the allowance price is ultimately equivalent to a “product tax.” Failing that, the commission could argue that it was acting to protect a global resource, i.e., that avoiding carbon leakage was the central aim of the . The “conservation of exhaustible natural resources,” which includes the Earth’s atmosphere, is a valid ground for violating principles, subject to certain conditions. Such an exemption would also have to be claimed for a new customs duty.
However, the European Council decision has exacerbated the risk thatdispute settlement panels will regard the new instrument as a means of generating income, rather than a means to protect the . This would make a difference if trading partners challenged the new tool. The focus, which would be taken into account in rulings, is currently slipping into the background.
Don’t Underestimate the Diplomatic Effort
Aborder adjustment mechanism will need extensive explanation given the many open details, and it can only promote international policy cooperation if trade partners are informed at an early stage and regularly consulted. For this, the should use forums and the climate regime as well as other international organizations. In 2012, the was made painfully aware of the difficulties involved in going it alone, after seeking to include international aviation in the . Major partners put political pressure on the , even threatening sanctions, and the union decided to backtrack and reduce the coverage of the ETS to flights within the .
Trust can only arise if the troubled and expresses this clearly and often. This task has probably become much more difficult after the European Council decision because a fiscally-motivated border adjustment cannot be convincingly attributed to these multilateral concerns — especially as the revenues would flow to the rather than to funds supporting climate protection, for example, in poorer countries. If a CO2 border adjustment specifically targeted cement, steel and other energy-intensive industries, as has already been discussed, producers from emerging and industrialized countries would be especially affected.adheres to multilateral climate and trade agreements — i.e., supports the Paris Agreement and the
The union should start discussions with these countries without delay. A good opportunity will arise at the meeting of G20 finance ministers in Saudi Arabia toward the end of the year. In addition, the depend on how the world’s major economies react to it.should insist to the US that this initiative is not intended as a provocation in the smoldering customs dispute. Ultimately, the policy success of a border adjustment will
*[This article was originally published by the German Institute for International and Security Affairs (SWP), which advises the German government and Bundestag on all questions relating to foreign and security policy.]
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
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