21 Oct 2019
European Commission President-elect Ursula von der Leyen to Push for Ambitious Carbon Border Tax
In her political guidelines for the next European Commission, President-elect Ursula von der Leyen has defined an ambitious climate agenda. She has stated that she plans to propose a European Green Deal that would include legislation seeking to turn the EU into a carbon neutral economy by 2050. To reach such an objective, von der Leyen manifested that she intended to put forward a comprehensive plan to reduce EU carbon emissions by at least 50% as early as 2030. To complement the comprehensive plan, the President-elect mentioned that she “will introduce a Carbon Border Tax to avoid carbon leakage. This should be fully compliant with World Trade Organization rules. It will start with a number of selected sectors and be gradually extended.”
Within Europe, French president Emmanuel Macron has already described a carbon measure as “indispensable” and the French government has put forward concrete proposals in the past to include imports of carbon-intensive products into the EU Emissions Trading System.
Literature that is available on the topic explains that border adjustments for carbon-intensive products could pave the way for increased climate ambition by levelling the competitive playing field. These measures can further exert political pressure on countries with less ambitious climate-change related laws, serving as a lever. According to some experts on the topic, the measure should be limited to primary goods, e.g. cement, steel and aluminium. These are trade-exposed sectors facing high carbon costs, and they have only a limited ability to pass these costs through to consumers. It is felt by such experts that targeting the sectors most at risk of carbon leakage strengthens the environmental effectiveness of the measure, which would in turn improve its legal defensibility under WTO law.
A primary concern for the EU would, indeed, be the risk of contravening international trade rules. Although the European Commission’s President-elect has noted that the measure “should be fully compliant with World Trade Organization rules”, Reuters has recently reported that major powers might stalwartly respond if the European Commission’s proposal ever becomes law. However, according to Reuters, the Mission of the United States in Brussels, which follows EU policy on behalf of the U.S. government, did not yet comment on the future likelihood of such a measure. On the other hand, Russian industry leaders have apparently intimated that Russia could be introducing its own measures to curb emissions following Russia’s ratification of the Paris climate accord, and, in principle, any such EU tax could be labelled as discriminatory. The European steel industry, represented by EUROFER, has, however welcomed the planned-for border tax.
As a matter of precedent, Reuters recalled that mainland China and other foreign governments had previously accused the EU of acting beyond its jurisdiction when it intended to include international aviation in the EU Emissions Trading System. Indeed, the attempt by the EU to charge all aircraft for their pollution led to threats from – for example – mainland China to withhold multi-billion-dollar orders for Airbus aircraft, forcing the EU to suspend the law in 2012.
Hong Kong traders might recall that WTO rules prohibit discrimination between imports into a WTO Member’s market and the Member’s domestic products. However, general exceptions to GATT obligations allow WTO Members to impose measures necessary to protect the environment, as long as these are not applied in a manner that constitutes a means of arbitrary or unjustified discrimination and are not a disguised restriction on international trade. Taking this into account, the design and implementation of a border measure would have to ensure fairness, transparency and predictability to improve political acceptance by trade partners.
The road ahead for President-elect von der Leyen’s plans for a carbon tariff could well be a bumpy one and is likely to put the EU’s climate and trade diplomacy to the test. However, should it be properly designed and implemented through a fair and transparent process that engages trade partners, and possibly even offer revenue reimbursement to developing country exporters, border carbon measures can become a key enabler for an ambitious EU climate policy.