Europe - Greening trade without a carbon tax

In line with its commitment to climate action under the Paris Agreement, the European Union (EU) aims to be climate-neutral by 2050. Pledging to drastically reduce Europe’s greenhouse gas emissions, the 2019-2024 European Commission (EC) envisages a number of measures. One such decarbonisation measure has already jolted climate and trade discussions around the globe: China, Russia and the United States have made it known that they oppose it. The measure may appear to be a market-access anti-dumping and anti-subsidy defence instrument in disguise.

The Carbon Border Adjustment Mechanism (CBAM) is a measure tackling the carbon intensity of domestic and imported products. Three ways of CBAM implementation are being discussed: carbon tax on imports and domestic production, a customs duty on imports, and the extension of the EU Emission Trading System (ETS). All of these forms would require the calculation of carbon benchmarks for products covered by the measure. The purpose is multifold as well: a CBAM would preserve the integrity of EU climate policy and industrial competitiveness; it would ensure that all emissions come with a cost, regardless of their country of origin; and it would help avoid the risk of carbon leakage, i.e., the loss of sales or entire industries to cheaply-priced, carbon-intense imports (cf. below).

As it brushes against the non-discrimination and other rules of the World Trade Organisation (WTO), CBAM represents no silver bullet. The intended 2021 publication of a CBAM proposal will affect a delicate balancing act between EU’s “commitment to becoming the world’s first climate-neutral continent,” the preservation of its competitiveness, and the rules-based international trading system. Aligning trade policy with decarbonisation, a CBAM may cause more problems than it attempts to solve. Nevertheless, even if the current version of the EU’s CBAM proposal may be neither technically viable nor WTO-compatible, the EU should keep it on the agenda for increasing its leverage in debating climate action internationally, while developing parallel mechanisms and stronger clean-industry markets for a carbon-freer future. Read more…