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European Commission Warms to Ideas about Future of Carbon Border Measure

As recently reported, upcoming officials of the European Commission (“Commission”) have manifested their interest in taking measures to address imports with high carbon content and the so-called “carbon leakage” phenomenon. Officials are still considering the form of the measure. MLex has reported that the measure could take the form of a tax on imports based on their carbon content, a type of customs duty, an extension of the EU's emissions trading system to commercial partners, or a carbon border adjustment mechanism. Phil Hogan, recently elected Trade Commissioner, has been entrusted with the task of implementing the measure, one which does not seem easy but rather challenging.

The measure aims at protecting EU industries producing goods in a less carbon intensive way than their international competitors. It seeks to make up for the difference between the EU’s carbon price applied to heavy industry through the Emissions Trading Scheme (“ETS”) and lower or non-existent carbon prices levied in third countries, with the objective of allowing European companies to compete internationally on a level playing field. The measure also has the purpose of preventing companies from establishing outside the EU in order to circumvent the Union’s strict environmental rules, a practice known as “carbon leakage”.

Discussions at the EU level are being held regarding the form of the measure and its implementation in order to prevent a breach in the legal framework of the World Trade Organization (“WTO”).

Trade experts, EU officials and stakeholders have suggested different ways that the measure could take without unfairly discriminating against foreign competitors. Researchers at Bruegel, a Brussels-based think tank, have explained that the EU must work with other WTO members to establish a model of permissible carbon border taxes. Bruegel has warned that climate policies “need to be consistent across industries and activities in order to be internationally credible and perhaps also WTO legal”.

Moreover, trade experts at the Centre for European Reform, have explained that the measure should only initially apply to a “small number of emission-heavy industrial sectors”, as is currently the case with the ETS. The Centre for European Reform also advised the Commission that the measure must be as transparent and open as possible while putting in place mechanisms that will guarantee that third countries may seek advice and appeal any decision.

According to different media outlets, steel industry representatives have voiced their support for the measure. An official at ArcelorMittal – one of Europe’s major steel-producing companies – expressed that the measure would be key to stopping “carbon leakage” of high emitting industries leaving the EU as a result of the increased carbon price. However, actors in the EU steel industry have expressed concerns that any new measure could leave EU steel producers vulnerable to retaliation.

Certainly, the implementation of the measure will not be an easy task. Furthermore, the form of the measure has raised concerns in the EU.

Bruegel has advised that other instruments should be considered by the Commission including subsidies for low-carbon exports and stricter environmental standards that importers would have to comply with in order to access the EU market. MLex has reported that Pascal Canfin, the chair of the European Parliament’s environmental committee, recently addressed the President of the Commission, warning her that the measure should not take the form of a tax, as such form could breach WTO law and would require the unanimous approval by all EU countries. Hong Kong traders might recall that EU law requires unanimity of its Member States when seeking to pass new EU tax rules. Canfin suggested, instead, that the measure should take the form of a “carbon border adjustment mechanism”. According to Canfin, the mechanism should "mirror" the ETS. For products where EU producers have free carbon allowances, such as steel, imports should have an equivalent allowance before the tariffs take effect. He added that the EU’s work should “start with key commodities where the chance for carbon leakage is tangible”.

Overall, it seems that both the determination of the form of the measure and its implementation will be a challenging task. The EU will need to work with other WTO members to establish a permissible form of the measure and an implementation mechanism that is not unjustifiably trade restrictive. Hong Kong traders should expect the proposal for and eventual adoption and implementation of the measure during the term of the new Commission.

Content provided by Picture: HKTDC Research
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