As Europe plans its recovery from the COVID-19 crisis, many of its leaders are insisting on a “Green Recovery” that would insure Europe continues to move forward on a sustainable path to carbon neutrality by 2050. The “Green Recovery” would accelerate the implementation of the ambitious European Green Deal, the potentially more impactful cousin of the United States’ Green New Deal.
However, there is one potential blind spot in the European Green Deal that is taking on new urgency in the effort to address the current crisis: the proposed carbon border adjustment mechanism, which would tax goods imported into Europe based on their greenhouse gas footprint. A push from some corners in Europe to accelerate the timeline for implementation of this mechanism to include it in an initial round of “Green Recovery” could gloss over the much-needed effort to create a system for measurement and verification of greenhouse gas emissions. Without auditable greenhouse gas data from both inside and outside the EU, the EU could inadvertently reward high carbon emitters.
The mechanism, sometimes referred to as a “carbon border tax,” would result in a standardised carbon emissions price between the EU and its imports. It would likely to be tied to the EU’s Emissions Trading System and is anticipated to cover multiple sectors, including energy, shipping, and manufacturing. A sound carbon border adjustment mechanism would incentivise lower carbon production inside the EU, and for goods imported into the EU while penalising high carbon intensity imports.
Further, the mechanism would be an effective tool to address carbon leakage—which occurs when manufacturing or energy production shifts to countries with less stringent carbon emissions policies. A good example of carbon leakage in the EU is when countries import coal-generated electricity while simultaneously phasing out coal plants domestically. The EU could address this issue - and seems likely to do so - by including energy imports in the carbon border adjustment mechanism. Competing energy producers would be incentivised to lower carbon emissions in energy production and transmission to gain a greater EU market share.
In short, if implemented properly, the carbon border adjustment mechanism could become a key component of the EU’s efforts to realise a carbon-neutral economy by 2050. And, perhaps even more importantly, it could help drive further global climate action by incentivising other countries to lower the carbon footprint of their industries and products.
However, the effectiveness of the carbon adjustment mechanism will rely on the availability and accessibility of accurate, transparent, and auditable carbon emissions data from energy suppliers and other industries subjected to the carbon border tax. If data availability and reliability vary among importing countries, the border adjustment could incentivise data cheating and create the unintended consequence of rewarding higher-polluting, but less-transparent, countries.
Levying a carbon border tax on natural gas imports is particularly at risk for this type of abuse, in large part because of the complicated and still developing efforts to measure methane leakage that occurs during the production, processing, transmission, and distribution of natural gas. Methane is about 21 times more potent than carbon dioxide in contributing to climate change, so getting methane measurements right will be crucial for the effectiveness of the carbon border adjustment mechanism.
Multiple technologies can track the life cycle greenhouse gas emissions of natural gas, with varying levels of accuracy. However, no global standards for tracking, modeling, verification, and disclosure exist currently. As a result, energy producers across the world have different levels of transparency and data quality.
US companies have led the way on voluntary tracking, disclosures, and commitments to reducing the methane emissions of natural gas, while the data for the EU’s largest natural gas supplier - Russia - is not easily available or verifiable. Russia’s natural gas system is notoriously high in methane leakage, and many observers suspect that US liquefied natural gas (LNG) actually has lower greenhouse gas intensity when shipped to Europe - despite the higher energy intensity of liquefying and transporting the gas - than Russian piped gas.
Given that natural gas makes up 24.4% of primary energy consumption in the EU, getting accurate methane data on all gas imported by Europe is necessary to make a border adjustment tax effective at lowering greenhouse gas emissions from the energy sector.
But for now, there is no EU methodology for comparing the emissions intensity of US LNG exports and Russian piped gas. Without a standardised metric, companies with voluntary disclosures could be penalised under the new carbon border tax. Therefore, the first critical step to EU’s carbon border tax should entail a mandate for quality emissions data.
The EU has a track record of rolling out detailed regulatory frameworks to address critical issues in the energy sector. The Third Energy Package, for example, significantly reduced threats from monopolistic suppliers through market diversification and liberalisation.
Likewise, the carbon border adjustment could lead to standardised carbon emissions tracking and unified climate action. The consultation and development of the carbon border tax methodology should start as soon as possible, but it should not be rushed to be included in the initial round of “Green Recovery.” Instead, Brussels should stick with their original plan to produce a draft proposal of the border carbon tax framework by early 2021 to give themselves enough time to get these key details right.
The carbon border tax could fill the void in global standards for tracking and verifying greenhouse gas emissions, including methane, and could encourage further climate innovation. Accurate data will play a crucial role.
Richard L. Morningstar is the founding chairman of the Atlantic Council’s Global Energy Center and a former US ambassador to the European Union.
Randolph Bell is Director of the Global Energy Center and Richard Morningstar Chair for Global Energy Security at the Atlantic Council.
Olga Khakova is Associate Director for European Energy Security at the Atlantic Council.
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