The EU is readying a proposal to impose tariffs on those countries with lax climate policies.
While some world leaders prepare showy new climate pledges ahead of U.S. President Joe Biden’s Earth Day summit starting Thursday, the EU is arriving with a threat: do more to cut emissions or the world’s largest single market will make you pay.
European Commission Executive Vice President Frans Timmermans told a U.S. congressional subcommittee late Tuesday that Europe will protect its industries against carbon leakage — or competition from countries with lax climate rules — by setting a levy on high carbon imports, also known as a Carbon Border Adjustment Mechanism (CBAM).
"We are not telling people to go live in cold caves and munch on grass. Ours is a positive proposition," said Timmermans, who is preparing to roll out the European Green Deal, a sweeping policy package aimed at reaching net zero emissions by 2050.
But he warned that the risk of carbon leakage "increases as the EU raises its climate ambition above that of its trading partners."
Biden is expected to announce a new 2030 U.S. emissions goal this week, ahead of the climate summit of around 40 world leaders.
But the EU’s plan exposes the soft underbelly of Biden’s climate efforts — questions of whether he has the ability to transform any of his grand promises into law. That turns U.S. industry into a potential target of the EU’s trade measures.
The White House has been sending urgent messages to the EU that it wants Brussels to put its CBAM policy in the deep freeze.
State Department climate lawyer Sue Biniaz said the discussion with the EU was “fraught with complexity on both sides of the equation.” She said a U.S. carbon border tax was not an “extremely active possibility.”
Diplomatic tremors
The Biden administration also believes the EU proposal is potentially toxic and could undermine careful diplomatic efforts to get emerging economies to put forward new climate targets.
Several invitees to Biden’s summit have voiced concerns. Ministers from China, Brazil, South Africa and India called it “discriminatory.” China’s President Xi Jinping warned his French and German counterparts against it on Friday.
Australian Trade Minister Dan Tehan was in Brussels this week lobbying the EU against a potentially “protectionist” policy, which he told POLITICO was “like putting shutters around your economy.”
Yet the EU is determined to press on, even if that means going alone.
“We are open to discuss, team up, to join, but I don’t think this should derail the Commission from working on the proposal. The proposal will be adopted in June,” said an EU official.
In his written testimony, Timmermans told the House Foreign Affairs Subcommittee for Europe, Energy, the Environment and Cyber that the EU’s CBAM would start operating in January 2023 “at the earliest.”
The EU is now putting the final touches on its Climate Law meant to enshrine its 2030 and 2050 climate goals into Europe-wide legislation. That puts it way ahead of the U.S., China and other big polluters, but the risk of frontrunning is that some companies might seek less regulated environments. Brussels is keenly aware that neither this week’s meeting, nor November’s COP26 climate summit, are likely to spur efforts from every part of the globe. So as it starts to turn the screws on polluters at home, it is moving to protect itself from the inaction of others.
The EU hopes that the threat of the CBAM will be enough to get other countries to fall into line.
“Preferably, if every country would fulfill its Paris commitments, it would never have to be used,” said Timmermans.
How will it work?
Many details of the policy remain to be fleshed out. The European Commission is finalizing a study on the market impacts of a levy, but won’t release a detailed proposal until the end of June.
Brussels has always stressed the measure will be compatible with World Trade Organization rules, which means imported products cannot be subject to tougher measures than products produced at home.
That’s why the Commission’s preferred option is a system mirroring the Emissions Trading System (ETS), the EU’s cap-and-trade carbon market where EU producers pay for emissions, currently priced at more than €40 per ton of carbon dioxide. Importers would be required to buy permits for imports of certain goods. Countries with a similar carbon price — like Norway, Liechtenstein, Iceland, and possibly Switzerland and the U.K.— would be exempted.
That means the WTO is the least of Brussels' worries. Beijing and Washington are a much more immediate problem. If they feel discriminated by the EU's CBAM, it is unlikely they would wait for the WTO to decide whether the system is legal.
“There's some concern that U.S. industry could also get caught up ... because we don't have a carbon price on industry in the United States, and we're not likely to have one in the future,” said Samantha Gross, a foreign policy fellow at the Washington-based Brookings Institution.
The decision of which sectors to target will be highly political.
The scope of the scheme is likely to be limited at first. The Commission study looked at steel, aluminum, cement, power, and some chemicals used in fertilizers, but it’s still unclear which ones will actually be targeted. While power and cement imports are limited to some countries in the EU’s neighborhood, chemicals and steel are highly traded goods, which may trigger broader repercussions from source countries including the U.S. and China.
EU divided
For the moment there is also limited buy-in from the 27 members of the EU — the measure will eventually need the support of a weighted majority of EU countries.
France has been the chief proponent of the idea, with French President Emmanuel Macron putting it on the Commission’s agenda in 2019. But so far only nine countries — Austria, the Czech Republic, Denmark, France, Lithuania, Luxembourg, the Netherlands, Spain and Slovakia — backed a CBAM in an op-ed for POLITICO. The majority have stayed silent.
The elephant in the room is Germany, whose Economy and Energy Minister Peter Altmaier signaled he’s open to such a measure, breaking with his conservative party’s aversion to measures that could hurt Germany’s export-led economy. But a federal election in the fall means Berlin’s final position is unknown.
German industry is wary of unilateral moves that could trigger retaliation against its exports and upend trade relations. “Most of us see some sorrows if this instrument would be implemented against the will of major trading partners, like the U.S. and China,” said Carsten Rolle, head of energy and climate policy at industry lobby BDI.
“When you start to get to the details, it's an absolute bear to implement,” said Gross. “But nonetheless Europe seems quite serious about it.”