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Carbon Tariffs on Imports into the EU Being Considered by the European Commission

On 13 June 2019, European Commissioner for Trade, Cecilia Malmström announced that the French proposal for a “carbon tariff” could well fit into the EU “greener” trade policy that seeks to address the threat of climate change. Mrs. Malmström explained that the proposal would comply with World Trade Organization (“WTO”) rules provided that it is applied on a non-discriminatory basis.

Earlier this year, Business Europe, Europe’s largest business lobby group, had supported a proposal by France to impose a carbon tariff at the EU’s borders. The objective of such tariffs is to level the playing field between the European industry and competing businesses located, for example, in mainland China or the United States. It is alleged that these countries don’t respect the same environmental objectives as the EU, are not engaged in global efforts to address climate change, and, therefore, do not impose pollution constraints on industries, while EU businesses are subject to stringent carbon emission constraints.

It is the first time that Business Europe considers supporting the idea of an EU carbon tariff, which it has traditionally opposed amidst fears of triggering a trade war with EU trading partners. Business Europe stressed that European businesses want to demonstrate their intention to enforce their climate targets, and that if, by 2023, some major countries do not converge with the EU on climate policy, the imposition of carbon tariffs could be considered as a positive regulatory option. However, Business Europe has explained that backing the measure would indeed only be a matter of last resort. In fact, the Business association remains worried that such a carbon tariff may lead to retaliatory measures from other countries and may be found to breach WTO rules.

Nonetheless, Business Europe may still support the carbon tariff idea due, in large part, to the decision of the United States to withdraw from the 2015 UN Paris Climate Agreement, which would confer an unfair advantage on companies in the United States vis-à-vis EU businesses.

In that context, it is reported that Business Europe views the carbon tariff as a measure that may be implemented in order to address the competitiveness of energy-intensive EU industries, such as steelmaking, which are in the frontline of global competition.

That said, Business Europe still considers that the carbon tariff would be an extremely difficult measure to implement. There would, for example, need to be greater transparency in global sourcing to be able to track materials used in industrial processes. The measure would also be complex as it would need to be coherent with other EU measures on climate policy, such as the EU’s Emissions Trading Scheme for greenhouse gases. In this regard, it has been reported that Business Europe’s preferred option would be the distribution of free carbon pollution permits under the EU’s cap-and-trade scheme for greenhouse gases.

France advocated in favour of the imposition of the EU carbon tariff, explaining that a border carbon adjustment mechanism is necessary in order to avoid penalizing EU companies because of EU countries’ climate commitments. This proposal was made by the French President to “put climate at the heart of the EU project”. 

In addition, Mrs. Malmström explained that the carbon tariff needs to be applied in a non-discriminatory manner in order to guarantee compliance with WTO law. The WTO mandate of non-discrimination requires the observance of the National Treatment and Most-Favoured Nation principles. On the one hand, the National Treatment principle requires that products originating in the territory of any WTO Member (e.g. mainland China) imported into the territory of any other WTO Member (e.g. the EU) shall not be subject, directly or indirectly, to taxes or other charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Consequently, if a carbon tariff were applied to imported products from mainland China, it must not be applied in excess of the internal carbon reduction measures that the EU or EU Member States levy on the domestic industry.

On the other hand, the Most-Favoured Nation principle provides that with respect to customs duties of any kind imposed on, or in connection with, importation, any advantage, favour, privilege or immunity granted by any WTO Member to a product originating in any other WTO Member shall be accorded immediately and unconditionally to the like product originating in the territories of all other WTO Members. In a nutshell, the Most-Favoured Nation principle would call for the application of the import carbon tariff across all WTO Members unless a differential treatment is justified. A circumstance that could justify a differential treatment would be evidence of compliance with the environmental objectives of the EU.

Hong Kong traders might be interested in following up on any future decision of the EU to impose – or not – a carbon tariff upon imports of energy intensive products. Considering the Most-Favoured Nation principle, such a tariff would need to be applied to all WTO Members in a non-discriminatory manner, therefore, become applicable to products originating in Hong Kong, mainland China and other countries, in the event that the industry in these countries does not meet the environmental objectives of the EU.

Content provided by Picture: HKTDC Research
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