Blog Post

Border Carbon Tariffs: Giving Up on Trade to Save the Climate?

Ursula von der Leyen plans to introduce a border carbon tax to avoid that cutting EU carbon emissions forces EU companies to move their activities abroad. But will this tax trigger a conflict between climate preservation and the multilateral trading system, or can trade and climate preservation coexist?

By: and Date: August 29, 2019 Topic: Energy & Climate

In her political guidelines for the next European Commission, the President-elect, Ursula von der Leyen, has defined an ambitious climate agenda. In her first 100 days in office, she plans to propose a European Green Deal that would include legislation binding the European Union to become carbon neutral by 2050. To reach this objective, she intends to put forward a comprehensive plan to reduce EU carbon emissions by at least 50% already by 2030.

But what chance is there that EU countries will agree this time around to adopt binding targets to reduce, and eventually eliminate, emissions when they failed before?

True, there seems to be now a clear majority of EU citizens in favour of more measures to reduce carbon emissions, but there are still many arguments against stricter EU measures. One such argument is that Europe alone cannot prevent climate change since it accounts for less than 10% of current global CO2 emissions, and this share will decrease if the EU meets its new targets. Other major emitters must also make efforts, and the Commission President-elect was well inspired therefore to announce that the EU will lead international negotiations to increase their level of ambition.

The first-best scenario would be a binding international agreement (replacing or updating the Paris climate agreement) that commits all major carbon emitters to adopt domestic measures (a carbon tax, an emission trading system, or another equivalent scheme) to become carbon-neutral like the EU plans to do by 2050.

But what if some countries refuse to participate in a new agreement? Mrs von der Leyen’s plan is that the EU’s decision to go ahead with its ambitious measures should not be dependent on others agreeing to do the same. Instead, she said that in order “to ensure our companies can compete on a level playing field, I will introduce a Carbon Border Tax to avoid carbon leakage,” i.e. the shifting of carbon-intensive production to countries outside the EU. Such a tax scheme is often referred to as a “border carbon adjustment” (BCA) since it makes up for the difference between the domestic carbon tax and those levied in countries with lower (or no) carbon taxes.

The idea that ambitious domestic measures to eliminate carbon emissions should be accompanied by a BCA system to prevent carbon leakage is not unique to Europe, nor to politicians. It was recently endorsed by more than three thousand U.S. economists, including 27 Nobel laureates, 15 Chairs of the Council of Economic Advisers and all the four former Chairs of the Federal Reserve in a statement on carbon dividends.

On climate grounds, an EU carbon border tax could potentially be significant for three reasons. First, it could reduce emissions outside the EU since the fraction of emission-intensive associated with exports to the EU would be subject to the tax, and therefore eliminate leakage. Second, given the size of the EU market (roughly the same as the United States or China), it could be a powerful incentive for non-EU countries to participate in multilateral negotiations and reach a first-best a global green deal. Third, it could pre-empt the barrage of criticism inside the EU that would kill the European Green Deal for putting an unreasonable burden on EU companies and workers in the name of climate change.

But what about on trade grounds? Free traders and the trading community at large have traditionally been sceptical about BCAs. So, should we worry that their introduction by the EU “will likely trigger a conflict between climate preservation and free trade”?

Border carbon taxes are unilaterally decided trade barriers. As such, they could be misused for protectionist reasons and undermine the multilateral trading system. In the worst case, they might simply jeopardise trade and not even help the climate.

But, as we discussed in an earlier contribution, if correctly designed, BCAs could improve climate without endangering the multilateral trading system. This will not be easy, but it is possible provided the following conditions are met.

First, the EU and other countries considering the introduction of BCAs should be mindful that special interests may seize the opportunity to enhance their protectionist agendas. It is crucial therefore that the system is designed to minimise the risk of protectionist abuse. Preventing protectionism is important not only from a national economic perspective but also from a climate perspective since wide-spread protectionism might lead to inefficient production patterns. Avoiding protectionism will not be an easy task, but there is already useful work that has identified some of the desirable features of a BCA regime from this perspective.

Second, it is crucial that the EU’s BCA be WTO-compatible. This would ideally be addressed through negotiations in the WTO about permissible BCAs. The current US Administration, and some other governments may not be interested in participating in such negotiations now. However, the EU and a group of like-minded WTO members should develop a proposal for a WTO agreement, which may eventually be adopted by all WTO members.

Third, the EU’s climate policies need to be consistent across industries and activities in order to be internationally credible (and perhaps also WTO legal). For instance, the EU cannot make exceptions for certain emission-intensive domestic industries and simultaneously apply BCAs for products that are largely produced abroad.

Finally, a unilateral decision by the EU to introduce BCAs can only be the counterpart of ambitious unilateral measures by the European Union to meet the objective of being climate neutral by 2050. Otherwise, the game would not be worth the candle.

Hence, in our view there is no inherent conflict between climate preservation and safeguarding the rules-based multilateral trading system, provided one avoids these four conditions are fulfilled.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

The European Green Deal needs a reformed fiscal framework

The European Green Deal should include a sustainable investment strategy that will help citizens change behaviour and companies switch technologies. But to finance it, the EU will have to increase the flexibility of its fiscal rules to encourage member states to invest in the transition.

By: Grégory Claeys Topic: Energy & Climate Date: December 10, 2019
Read article More on this topic More by this author

Opinion

Why border carbon adjustment is important for Europe’s green deal

The European Commission President-elect Ursula von der Leyen is pursuing ambitious environmental targets, notably to reach zero net emissions across the EU by 2050. This transition requires pricing emissions to incentivise producers to develop greener alternatives, while avoiding putting domestic producers at a disadvantage.

By: Guntram B. Wolff Topic: Energy & Climate Date: November 27, 2019
Read about event More on this topic

Past Event

Past Event

Enhancing climate policy through co-creation

First PARIS REINFORCE Stakeholder Council Dialogue

Speakers: Haris Doukas, Ajay Gambhir, Georg Zachmann, Dirk-Jan van de Ven, Jorge Moreno, Alexandros Nikas, Vangelis Marinakis, Glen Peters, Alexandre Koberle, Marc Vielle, Andrea Herbst, Rocco De Miglio, Annela Anger-Kraavi, Baptiste Boitier, Lorenza Campagnolo, Zsolt Lengyel and Joeri Rogelj Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 21, 2019
Read article More on this topic More by this author

Opinion

Under swollen tides, Venice says more about our future than our past

While tides high enough to submerge Venice used to be rare, occurring every two to three decades, they have now become increasingly regular. Five of the ten highest tides in recorded history occurred over the last 20 years, with the most recent one having occurred just last year. Is this the new normal?

By: Simone Tagliapietra Topic: Energy & Climate Date: November 18, 2019
Read article More on this topic More by this author

Podcast

Podcast

How to make the European Green Deal work (Part Two)

Nicholas Barrett and Guntram Wolff discuss industrial policy and the social consequences of the green deal with Grégory Claeys and Simone Tagliapietra.

By: The Sound of Economics Topic: Energy & Climate Date: November 14, 2019
Read article More on this topic

Opinion

Four pillars to make or break the European Green Deal

The recipe for a successful European Green Deal is as simple as it is breath-taking: to intelligently promote deep decarbonisation by accompanying the economic and industrial transformation this necessarily implies, and by ensuring the social inclusiveness of the overall process.

By: Simone Tagliapietra, Grégory Claeys and Georg Zachmann Topic: Energy & Climate Date: November 14, 2019
Read article More on this topic More by this author

Podcast

Podcast

How to make the European Green Deal work (Part One)

The European Green Deal will be a defining feature of Ursula Von der Leyen's incoming Commission. But will carbon border taxes and single carbon prices be enough to make Europe climate-neutral by 2050? This week, Nicholas Barrett and Guntram Wolff discuss Bruegel's new paper 'How to make the European Green Deal Work' with Grégory Claeys and Simone Tagliapietra.

By: The Sound of Economics Topic: Energy & Climate Date: November 7, 2019
Read article Download PDF

Policy Contribution

How to make the European Green Deal work

Ursula von der Leyen has proposed a European Green Deal that would make Europe climate neutral by 2050. With this Policy Contribution, the authors provide a first analysis on how to make this initiative work.

By: Grégory Claeys, Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance Date: November 5, 2019
Read about event

Past Event

Past Event

What industrial policy for the European Green Deal?

This event will be a workshop, aiming to look into the design and implementation process of the European Green Deal. Each session will be introduced by three short presentations aimed at launching the discussion among all workshop participants.

Speakers: Jos Delbeke, Bertrand Déprez, Markus Hess, Laura Piovesan, Megan Richards, Simone Tagliapietra, Mary Veronica Tovšak Pleterski, Kurt Vandenberghe and Reinhilde Veugelers Topic: Energy & Climate, European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 4, 2019
Read article More on this topic More by this author

Blog Post

Demystifying carbon border adjustment for Europe’s green deal

From carbon leakage to “green protectionism”, the European Green Deal envisioned by the incoming Commission has many critics. But some adjustments to the deal could make domestic manufacturers more carbon efficient while simultaneously encouraging foreign producers to become more environmentally friendly.

By: Guntram B. Wolff Topic: Energy & Climate Date: October 31, 2019
Read article More on this topic More by this author

Opinion

Europe: en finir avec la politique en silos

Projetée dans un monde de rapport de force dont les principaux protagonistes ne séparent pas géopolitique et économie, l’UE va devoir conduire un changement de logiciel culturel, une mutation organisationnelle et un rééquipement opérationnel, explique l’économiste Jean Pisani-Ferry.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: October 8, 2019
Read article More on this topic More by this author

Opinion

Coming soon: a massive laboratory for ‘Green New Deals’

Green New Deals’ are not going to turn countries into ‘hermit nations’,but they are not going to turn countries into economic paradises either. They simply are tools to achieve something more basic: ensure that climate change does not compromise our life in this planet. And this already looks like a good reason for them to be well worth our time.

By: Simone Tagliapietra Topic: Energy & Climate Date: October 1, 2019
Load more posts