Last week, the European Commission released a European Green Deal, committing to decarbonise the continent by 2050. Commission President, Ursula von der Leyen called the plan to cut carbon a growth strategy through investment in new technologies and access to green financing. Perhaps the most controversial aspect of the plan is a reference to the imposition of a border carbon adjustment mechanism (“BCA”) by 2021. The proposal starkly previews two possible paths on climate action: the first, a collective effort to cut carbon emissions, or secondly, a bifurcated global trading system in which clean economies use economic leverage to compel dirty economies to abide by minimum standards for carbon emissions and avoid a race to the bottom.
In a veiled warning to the United States, China and other exporters, the EU Commission explains that the BCA will only be utilised, “should differences in levels of ambition worldwide persist.” Such a mechanism only works in conjunction with an internal carbon tax like the EU’s Emissions Trading Scheme, which would also be tightened as part of the Green Deal. The BCA would impose a tariff on the import of goods from outside the EU based on the carbon footprint of those goods. Depending on how it is applied, a BCA theoretically would encourage other countries or industries in other, less-regulated economies to reduce their carbon footprint for continued access to European markets, while also protecting domestic European economies and industries from spending more - at least in the short term - to clean up their act.
The proposal, at a minimum, signals Europe is serious about climate being a foreign policy priority, but it remains vague on details. The tariff could be placed on imports of fossil fuels or fossil fuel-intensive products, such as steel or cement. The Commission will have to address how to establish the value of the tariffs based on carbon input, how a BCA would be consistent with World Trade Organization rules, and how tariffs would be reconciled if other countries took similar action. A developed proposal would also need to avoid or minimise the increase in transition cost for cleaner energy; there would be an irony to making the import of wind turbines prohibitively expensive. It’s an ambitious agenda to sort out in only two years, but not impossible.
The use of economic leverage to achieve foreign policy goals is not novel. The United States and Europe have frequently turned to economic sanctions to compel behaviour from adversaries, notably Iran, Syria, and North Korea. In the past, the US has been wary to deploy such tools against major global economies, given the risks of severing major trading and financial relationships. The US has shown fewer qualms in recent years, however, imposing sanctions; in 2014 against major Russian banks and energy companies and recently imposing broad tariffs against China in an effort to reduce the trade deficit.
Yet, the United States has managed to escape its own medicine, even as it has bucked international consensus on critical issues like the Iran nuclear agreement, the World Trade Organization, and the Paris Climate Agreement. For example, the EU blocking statute that prohibits European companies from complying with the re-imposed US sanctions on Iran has become largely a headache for European companies and their lawyers, and the EU’s efforts to insert green clauses in new trade deals has seen mixed results. The EU has not established the same economic leverage as the US, given the dominance of the dollar. However, with over half a trillion dollars of US exports at stake, the EU may have identified a point of leverage more resonant with the Trump administration than the irreversible warming of the planet.
The imposition of a BCA against U.S. imports, however, may be an alternative reality to a collective effort to develop ambitious goals to cut emissions. The parties to the 2019 United Nations Framework Convention on Climate Change will meet in Glasgow in November 2020 to revisit their commitments established five years earlier in the 2015 Paris Agreement, which may be inadequate based on intervening studies to halt the increase in global temperature at two degrees Celsius.
Collective ambition will inevitably be more successful than economic combat. Indeed, a global BCA with standards established by the G20 or the OECD could even be the result of a collective effort by the United States and Europe to compel smaller rogue economies to limit emissions, limiting leakage and the risks of inadvertent harm to manufacturers and importers. But that will depend on who is in the While House in 2021. As the EU Commission has made clear, the BCA proposal is itself a threat intended to promote collective ambition, and preferably not the beginning of an antagonistic effort to protect a changing world.
David Mortlock is a senior fellow with the Atlantic Council’s Global Energy Center. Previously, he was director for international economic affairs at the White House National Security Council.
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