Virus era threatens Europe’s war on dirty imports

Europe’s plan to put a price on dirtier imports risks getting caught up in global trade tensions as the fallout from the coronavirus pandemic eclipses climate change as the biggest challenge for governments.

Called the “carbon border adjustment mechanism,” a proposal for a charge on selected products like cement and electricity is being drafted by the European Union after leaders of the 27 member states agreed to press ahead. Companies in the bloc see the measure to tackle imported carbon emissions as a way of shielding against cheaper, less green rivals. But now there’s a growing consensus that it may not even happen.

The EU wants to be a leader on climate action while protecting industries from lower-cost competition, but the era of Covid-19 has made that tougher. The proposal, which the EU estimates could raise as much as 14 billion euros ($16.5 billion) a year, keeps the pressure on the U.S., China and Russia to follow in seeking deeper emission cuts. Yet it also could end up fueling conflicts over who has access to which markets.

“It’s a tool that the EU would like to develop, even if preparing the legal side means fueling trade conflicts,” said Susanne Droege, senior fellow at the German Institute for International and Security Affairs SWP in Berlin. “Whether or not it will be applied will depend on the geopolitical climate.”

Enacting a border levy and potentially scaling it up in the future hinges on how key events unfold, particularly the U.S. presidential election in November. There would be less urgency for the EU to flex its muscles if Donald Trump is replaced by Joe Biden, whose campaign features a $2 trillion plan for combating climate change and a tax on imported carbon-intensive goods.

Part of the EU Green Deal strategy to zero-out greenhouse gases by 2050, the plan is to tax a portion of the carbon produced by global competitors of European factories. EU leaders endorsed an option last month of using revenues generated by the mechanism as a way of helping pay for a landmark economic rescue from the coronavirus crisis. A draft law is due next year.

The measure would initially cover a limited number of industries deemed most liable to relocate production from the EU to regions with laxer environmental policies—a phenomenon known as carbon leakage.

The precise method for determining the carbon content of imported goods is still being examined. To be spared the border charge, foreign products would need to have a lower carbon content or come from a country that charges a higher price on emissions. 

However, the goal of tying access to the vast European single market to the green credentials of EU trade partners may prove to be more bark than bite when the plan is translated into legislation. The reason is a fiendish array of legal, economic and political challenges.

“As I see it, the most realistic scenario for the next stage is a mostly symbolic measure,” said Michael Mehling, deputy director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology.

Still, symbolism matters in climate policy and Europe aims to use that as leverage to uphold the 2015 international Paris Agreement to fight global warming after Trump turned his back on the deal and doubts arose about whether other signatories including China will follow through on their commitments.

Industrial production in Europe is already less carbon intensive than in most of the rest of the world. The EU runs the globe’s biggest emissions-trading system, which imposes quotas for carbon dioxide on energy and manufacturing companies and requires those exceeding their limits to buy spare CO2 permits from those that emit less.

Just over a fifth of global emissions is subject to a carbon price, according to the World Bank. The costs of pollution in Europe jumped to a 14-year high of 30.8 euros per metric ton last month, boosted by expectations of tighter climate policies. BloombergNEF expects the price to rise further, exceeding 40 euros by 2030 and increasing the case for a carbon border adjustment mechanism, or CBAM.

“The risk of a trade war upon implementing a CBAM is likely to increase as the carbon price rises,” BloombergNEF analysts Antoine Vagneur-Jones and Emily Jackson wrote in a report on July 23. “It may therefore be desirable to implement the mechanism sooner rather than later.”

One challenge is ensuring any measure complies with the World Trade Organization’s open-market rules. That would require a carbon levy to replace the existing shield against carbon leakage. Currently the bloc gives free permits for a limited number of companies in the EU emissions-trading system to avoid them relocating production abroad.

Such a move would trigger opposition from cement, steel and aluminum producers, which want the new measure to be additional protection against competitors from countries with laxer climate rules.

Another hurdle is the Paris Agreement itself. The accord is based on voluntary pledges by countries and a European import levy would challenge that architecture, according to Peter Vis, a former chief of staff of the EU’s first climate commissioner, Connie Hedegaard.

“I’m really very doubtful about the idea of the CBAM,” said Vis, now senior advisor at Rud Pedersen Public Affairs consultancy in Brussels. “It will be very difficult to win widespread support for this idea internationally, in which case one has to ask what negative impact this might have in the international climate negotiations?”

The EU has already learned that moving alone on climate policy can backfire. In 2012, as a result of strong opposition from the U.S. and China, the bloc scaled back a law adding international flights to the carbon market.

Any European measure is likely to kick in later than a 2023 goal sought by EU leaders. That’s because the forthcoming commission proposal will need to be approved, probably with amendments, by national governments and the European Parliament in a process that often takes around two years.

As Georg Zachmann and Ben McWilliams at the Brussels-based Bruegel think-tank put it, the whole initiative is “much pain and little gain.”