Trade

Wanted: Perfect design for Europes carbon border tax

The EU wants to set a carbon border tax on imports to protect EU companies forced to comply with tough greenhouse gas rules. It just has to figure out how.

The idea is to prevent businesses from decamping to laxer jurisdictions — called carbon leakage — and to protect them from competitors in countries without their own carbon prices. Border levies flow into the EUs budget, meaning the tax could also help make up a shortfall caused by the U.K.s departure.

But setting a carbon border levy is fiendishly difficult. The EU will be a pioneer if European Commission President-elect Ursula von der Leyen carries through with her promise to bring in a carbon border tax that would be “fully compliant” with global trade rules. It will “start with a number of selected sectors and be gradually extended,” she wrote in her political guidelines.

“There is no final plan as such. There are a lot of ideas,” Kadri Simson, the nominee to be energy commissioner, said during her confirmation hearing on Thursday.

Border levies flow into the EUs budget, meaning the tax could also help make up a shortfall caused by the U.K.s departure.

The Commissions services are already at work, and Paolo Gentiloni, Italys commissioner-designate for the economy portfolio, is meant to lead on the proposal.

“We will try to be very quick and effective on carbon border tax but the legal and technical elements to define are not simple,” Gentiloni said Thursday during his hearing before the European Parliaments Monetary and Economic Affairs Committee.

Difficult design

An EU carbon tax has to be designed to fairly apportion the costs of a products carbon footprint, and to do it while not violating rules set by the World Trade Organization.

“Exactly how this is going to be done, I dont think anybody really knows that,” Cecilia Malmström, the outgoing trade commissioner, told POLITICO.

European industries pay a carbon price set by the blocs Emissions Trading System — currently about €25 per ton. Foreign companies dont have to pay that — making their products cheaper. A carbon border tax would make imports pay the same carbon price as domestic products. It should also act as an incentive to other economies wanting to sell to the EU to decarbonize their production processes.

“Exactly how this is going to be done, I dont think anybody really knows that” — outgoing Trade Commissioner Cecilia Malmström

“We need to have two objectives, increasing the price of CO2 and carbon tax at the borders. This is the effective way of increasing the cost of CO2 while avoiding the competition biases with Indians, Chinese or others,” French President Emmanuel Macron told reporters last month.

Berlin and Paris said theyre open to “examine possible measures to prevent carbon leakage, notably a carbon border tax” in a joint statement last month.

Global trade rules forbid discrimination between imports and domestic goods; a carbon tax could be allowed on grounds of environmental protection, as long as its not protectionism in disguise, and its equivalent to measures imposed on domestic products. If the levy violates WTO rules it could open the EU to retaliation from the U.S. and other large trading blocs.

“The key is to structure any accompanying border measure as a straightforward extension of the domestic climate policy to imports,” trade law professor and former WTO Appellate Body member Jennifer Hillman wrote in 2013.

To ensure WTO compatibility, the border price needs to be equivalent to the domestic one, and thats not easy.

One option the Commission is looking at is to use the annual average carbon price paid by a specific EU sector as a benchmark for a tariff. Imports produced with fewer emissions than their European equivalents, or which are already subject to an equal or higher carbon price at home, would be exempted.

Berlin and Paris said theyre open to “examine possible measures to prevent carbon leakage, notably a carbon border tax.”

To do that, the EU would have to devise a way to calculate the carbon intensity of a product — hitting dirtier products harder than clean ones.

“This is a big issue … And it gets very, very technical,” said Henrik Horn, a fellow at the Bruegel think tank.

A carbon tax also means a revolution in the blocs Emissions Trading System (ETS). The current system of giving free emissions allowances to energy-intensive industries as a way to combat carbon leakage would have to be scrapped; everyone would have to pay the same.

“If industry will have a [carbon] border tax, what is the purpose of giving free allowances as well?” said a senior EU officiRead More – Source

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