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The E.U.’s looking at a ‘carbon border tax.’ What’s a carbon border tax?

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- October 22, 2019

The incoming European Commission president, Ursula von der Leyen, was elected on a promise to deliver a “European Green Deal.” A key component of her agenda is a carbon border tax.

What exactly is a carbon border tax, and what are its consequences for the global fight against climate change? This is what you need to know.

So what is a carbon border tax?

Slowing global climate change will require reducing carbon emissions from a wide variety of sources. To do that, some countries have introduced carbon pricing plans to make carbon use more expensive and help the economy transition to zero carbon emissions. A carbon pricing plan could take the form of a standard tax on carbon emissions or a cap-and-trade system.

But not all countries want to tackle climate change at all — let alone set prices on emitting carbon. A carbon border tax, also known as a border carbon adjustment, imposes a fee on any product imported from a country without a carbon pricing plan. Hypothetically, the tax would adjust the price of the imported goods to be equal to those produced at home.

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Carbon border taxes could reduce global carbon emissions in three ways

First, these tax adjustments could solve the problem of carbon leakage — when carbon-intensive industries such as heavy manufacturing move to countries that don’t regulate carbon emissions.

Second, they might help countries that want to lead on climate policy use their market power against those that don’t. Some observers hope that such taxes would encourage more countries to participate in global climate agreements. It might also help enforce these agreements by raising the cost of shirking on a deal.

Third, border adjustments can affect internal climate discussions. In principle, they level the playing field between companies in countries with climate policies and those elsewhere. As a result, they allow politicians to say they are protecting the competitiveness of domestic companies.

That’s why they have been gaining support in Brussels as von der Leyen prepares to take office Nov. 1. In the United States, both former vice president Joe Biden and Sen. Elizabeth Warren have carbon adjustments in their climate plans. They have also appeared in numerous pieces of draft legislation.

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Border carbon taxes are on their way

There’s a lot still to be worked out, so don’t expect a concrete proposal in either Europe or the United States for a few years. But we’re likely to see various experiments with such adjustments. The Paris Agreement to fight climate change is built on a system of voluntary pledges by individual countries. Because some countries will do more than others, these tariffs will be tempting.

Here’s the big possible problem. The World Trade Organization prohibits protectionist tariffs, and some nations would surely argue that carbon adjustments fall in that category. Some legal experts argue that carbon adjustments could be compatible with WTO rules. If not, countries might be able to work out a political compromise that the WTO would respect.

Either way, if von der Leyen’s proposal moves ahead, the E.U. will soon face the challenge of figuring out how to design a legal and fair adjustment. The simplest solution would be to tie the border tax to the E.U.’s internal cap-and-trade initiative, the Emissions Trading System (ETS). But the price of carbon emissions in a cap-and-trade system like the ETS goes up and down based on supply and demand. That makes it hard to design a simple border adjustment, because it is not obvious how much the tax should be.

Moreover, any border tax will probably have to be grounded in an estimate of how much carbon was used to create each product. But carbon accounting is a deeply political exercise. It won’t be easy to design the rules that make border taxes work.

Border taxes are needed to solve problems in a world where carbon pricing dominates climate policy. Some experts think carbon pricing — with or without border taxes — will struggle to reduce climate change on its own. But there are other ways to approach climate policy. At the recent mayors’ C40 Summit in Copenhagen, 94 mayors endorsed the idea of a Global Green New Deal. They argue that cities don’t need to rely on carbon pricing — but can drive climate action by performing policy experiments that reduce costs for others by creating demand for new technology and developing best practices.

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In principle, a Global Green New Deal would encourage countries to take climate action that would produce substantial benefits, like jobs and economic growth. In this world, we wouldn’t necessarily need border tax adjustments to encourage climate action or to bolster political support internally.

Until then, expect to hear more about border carbon adjustments.

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Bentley B. Allan (@bentleyballan) is assistant professor of political science at Johns Hopkins University and author of “Scientific Cosmology and International Orders” (Cambridge University Press, 2018).