Atlantic Council Analyzes the Potential for a Carbon Trade War

December 18, 2020

Print This Article Share it With Friends

by Nick Silvis* (Advanced Biofuels USA)The world is undergoing drastic climate and ecological changes which will have dire ramifications on all facets of global activity. Critical trade relationships, such as the one between the United States and Europe, are facing increased opportunity and risk as the world’s economies shift to a new paradigm.

The existing Emissions Trading Scheme, in tandem with the European Green Deal’s commitment to a 55 percent reduction in emissions by 2030, is likely to result in the transition to energy-intensive manufacturing overseas. In an effort to guard against this carbon leakage, the European Union Green Deal aims to apply carbon taxes to imports through a carbon border adjustment mechanism. Similarly, the United States has proposed more than a half dozen carbon tax related bills in the past three years.[1]

On Friday, November 20^th, the Atlantic Council spoke at length with leading policy experts on the future of international policy cooperation regarding emissions reductions amidst a shifting economic paradigm. The EU Green Deal-- a comprehensive action plan to ensure an inclusive transition to a clean, circular, and carbon-neutral economy by 2050 with ambitious emissions reduction goals set for 2030— has become the cornerstone for post pandemic economic recovery.

Both Europe and the United States are considering some form of a Carbon Border Adjustment Mechanism (CBAM), which shields steel producers and other energy-intensive industries against cheaper imports from countries with less stringent climate policies. Essentially, CBAM introduces an import tax that boosts the competitiveness of metals and other goods produced domestically. George Frampton, a senior fellow at the Atlantic Council Global Energy Center, described CBAM as a potential trade irritant that could spark a trade war.

From an economic perspective, according to Matthew Porterfield, the Deputy Director of Harrison Institute for Public Law at Georgetown Law School, if a carbon trade agreement creates economic growth while carbon emissions remain level, overall greenhouse gas emissions will increase. Likewise, if a carbon trade agreement initiates the expansion of trade, the increased transportation of goods will result in a rise in greenhouse gases.

As for the legal component, trade agreements historically stifled climate and environmental policies. Porterfield discussed the North Atlantic Free Trade Agreement at length, which challenged the ability of the US Department of State to block the Keystone XL pipeline.

An influx of billions in green subsidies across the US and EU will undoubtedly increase trade tensions over border adjustments and the World Trade Organization (WTO). However, a trade war could be prevented if trade agreements were structured to take the impacts of climate into account in regards to economic and legal growth.

Currently, there exist three unique methods for enacting border carbon adjustments:

A carbon tax adjusted at the border;
The imposition of punitive tariffs on countries without comparable pricing standards; or
The inclusion of imports under the EU emission trading scheme.

David Kleimann a Visiting Research Fellow at the Institute of International Economic Law
through Georgetown University Law School analyzed the practicality of these proposals in the current EU political climate. According to his research, both the carbon tax and the creation of tariffs are infeasible in the EU. A carbon tax would require unanimity to the effect that a “single veto can derail the entire legislative dossier.” Punitive tariffs would require extensive restructuring of existing trade enforcement regulations through the legislative process as well as being incompatible with the WTO.

One potential avenue for future success according to the panel is to revisit and adjust the current trading schemes. Climate change geopolitics and trade agreements are imperative to the successful transition to carbon neutrality and will be intriguing to watch over the coming years and decades. READ MORE

*Nicholas Silvis, a sophomore at Gettysburg College majoring in Environmental Studies and Public Policy is particularly interested in the interconnections among science, policy and public opinion in international, federal, state and local contexts.

[1] The America’s Clean Future Fund Act proposed by Senator Dick Durbin in August of 2020 ("Durbin Bill"), American Opportunity Carbon Fee Act proposed by Senator Sheldon Whitehouse in April 2019 (“Whitehouse Bill”), Energy Innovation and Carbon Dividend Act proposed by Congressman Ted Deutch in January of 2019 (“Deutch Bill”), Stemming Warming and Augmenting Pay Act proposed by Congressman Francis Rooney in July of 2019 (“Rooney Bill”), Climate Action Rebate Act proposed by Senator Chris Coons in July of 2019 (“Coons Bill”), Raise Wages, Cut Carbon Act proposed by Congressman Dan Lipinksi in July of 2019 (“Lipinski Bill”), America Wins Act proposed by Congressman John Larson in August of 2019 (“Larson Bill”), Carbon Reduction and Tax Credit Act proposed by Congressman Sean Patrick Maloney in December 2019 (“Maloney Bill”), and the MARKET CHOICE Act co-sponsored by Congressman Brian Fitzpatrick in July 2018 (“Fitzpatrick Bill”)

European Parliament wants expanded carbon border (EnergyMarketPrice)

U.K.’s Boris Johnson Considers G-7 Bid on Green Border Levies (Bloomberg)

EU lawmakers call for carbon border costs by 2023, eventually for all industry (Reuters)

EU CARBON BORDER TARIFF PLANS REVEALED: (Politico's Morning Energy)

Excerpt from Politico's Morning Energy: EU CARBON BORDER TARIFF PLANS REVEALED: The EU plans to impose carbon border tariffs on steel, aluminum, cement, fertilizer and electricity, according to a draft document obtained by the POLITICO Europe team. Under the new scheme, expected to enter into force in 2023, importers will have to purchase carbon permits for imports from nations without their own prices on carbon. After a phase-in period, the permits will be priced at the average weekly cost of carbon dioxide in Europe’s cap-and-trade system.

Pressure play: Companies will be able to reduce their tariff burden by shifting production to nations that have put a price on carbon. EU policymakers hope that will push companies to source from more environmentally conscious nations and spur additional governments to put climate protections in place.

Implementation of the scheme is far from assured, and it could be altered before the European Commission proposes it to members, expected next month. The plan, pushed by France, will need backing from a qualified majority of countries in the European Council — and so far only nine of 27 have voiced support.

Several of the bloc’s trading partners have already expressed resistance to the plan, with nine countries — including the U.S., Turkey and Russia — raising concerns at the World Trade Organization. U.S. Climate Envoy John Kerry has told Europeans such a levy should be a “last resort.” READ MORE