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π Economy π Energy
Oil to lithium, the energy transition is shuffling the cards for global politics

“Carbon diplomacy is an issue of power and sovereignty”

Clément Boulle, Executive director of Polytechnique Insights
On May 13th, 2021 |
4 mins reading time

Marc-Antoine Eyl Mazzegga
Marc-Antoine Eyl-Mazzega
Director of the Energy & Climate Centre at the French Institute of International Relations (Ifri)
Key takeaways
  • The European Union is planning to introduce a carbon border adjustment mechanism.
  • It aims to penalise foreign manufacturers (rather than European manufacturers) and avoid “carbon leakage” (e.g. production being transferred overseas).
  • Carbon is becoming a matter of diplomacy, as shown by Poland’s nuclear program that was adopted to reduce its carbon footprint and end its diplomatic isolation in the EU.

EU mem­ber states tasked the Euro­pean Com­mis­sion with cre­at­ing a car­bon bor­der adjust­ment pol­i­cy by June 2021, to penalise for­eign exporters that do not respect the EU27’s green­house gas reduc­tion tar­gets. What might this actu­al­ly look like?

This pol­i­cy aims to cre­ate equal treat­ment between Euro­pean man­u­fac­tur­ing indus­tries, which are sub­ject to con­straints from the Emis­sion Trad­ing Scheme (ETS), and those that man­u­fac­ture over­seas and export their goods to Europe. The objec­tive is to avoid car­bon leak­age result­ing from an increase in imports or a trans­fer of pol­lut­ing indus­tri­al activ­i­ties over­seas, by strength­en­ing car­bon price restric­tions (now over €40/ton) so as to avoid plac­ing for­eign man­u­fac­tur­ers at an advantage.

In the medi­um term, we want to try and encour­age for­eign man­u­fac­tur­ers to reduce their car­bon foot­print, and to push these coun­tries to imple­ment sim­i­lar car­bon pric­ing mea­sures. Cer­tain goods will be tar­get­ed by the pol­i­cy, such as steel and cement. Exporters will have to prove that their emis­sions are low­er than the aver­age rate applied if they wish to be exempt or show that indi­rect and direct restric­tions apply in their coun­try with an equiv­a­lent effect to Europe’s car­bon price. To com­ply with WTO reg­u­la­tions, this mech­a­nism must be non-dis­crim­i­na­to­ry, mean­ing that it must apply to all and require a pro­por­tion­al reduc­tion of Euro­pean man­u­fac­tur­ers’ free emis­sion allowances. The rev­enue must be fed into the Euro­pean bud­get, to finance stim­u­lus pack­ages, but part must also go to the coun­tries of ori­gin to sup­port them in their decar­bon­i­sa­tion process.

How­ev­er, there are quite a few prob­lems – which goods should be tar­get­ed? What about coun­tries with no car­bon mar­ket, but do have reg­u­la­to­ry restric­tions with a shad­ow price? How can Europe avoid alien­at­ing allies like India and endan­ger­ing free trade? How can it pre­vent coun­tries and com­pa­nies from trans­fer­ring their car­bon-intense exports to oth­er areas, which would not solve the prob­lem at all? In any case, two things are cer­tain – Euro­pean com­pa­nies will be sub­ject to greater restric­tions and must be pro­tect­ed from for­eign com­pe­ti­tion, and inter­na­tion­al trade rules must account for issues relat­ed to envi­ron­men­tal and cli­mate exter­nal­i­ties, which are per­fect­ly legitimate.

Is there such a thing as car­bon diplomacy?

Ide­al­ly, the G20 would intro­duce inter­na­tion­al car­bon pric­ing, which would be imple­ment­ed grad­u­al­ly by all major indus­tri­al pow­ers – a high­er price for the most afflu­ent coun­tries, and an ini­tial­ly low­er price for devel­op­ing nations. One would need to make sure that this pric­ing applies every­where and to all rel­e­vant sectors.

That is not cur­rent­ly the case. The EU is a large eco­nom­ic mar­ket that has mor­phed into a polit­i­cal struc­ture. With the Green Deal, car­bon neu­tral­i­ty and post-Covid-19 stim­u­lus plans, it has now been entrust­ed with a major respon­si­bil­i­ty – to coor­di­nate the decar­bon­i­sa­tion process in Europe, while mak­ing sure that it strength­ens the well-being of all Euro­peans, cre­ates wealth, and rein­forces region­al cohesion.

The EU can­not suc­ceed if it does not draw on all its tools to achieve that goal: these include trade, indus­tri­al and fis­cal poli­cies. There is indeed such a thing as car­bon diplo­ma­cy, and it is becom­ing an issue of pow­er and sov­er­eign­ty. For now, Europe has sparked a wake-up call around the world, and all gov­ern­ments and major man­u­fac­tur­ers are anx­ious about the next prepara­to­ry phas­es. Every­one under­stands that the effects could be huge. That is also why ten­sions run high, and why Europe may end up imple­ment­ing a basic mech­a­nism with­out real scope, but which could be strength­ened lat­er on. 

For exam­ple, the Unit­ed States do not have a car­bon mar­ket, but may imple­ment equiv­a­lent reg­u­la­tions – so how should that be mea­sured? Chi­na has one, but it is start­ing out at the same rhythm as the ETS in Europe ten years ago, so is that good enough? One thing is clear: if Europe does not defend its inter­ests and if its tran­si­tion destroys more jobs than it cre­ates, cities and whole regions will suf­fer, the entire Euro­pean struc­ture will fold, and the tran­si­tion will be jeopardised.

Poland is the num­ber one coun­try in Europe for green­house gas emis­sions due to its coal-fired pow­er sta­tions. It plans to build nuclear reac­tors to improve its car­bon foot­print, but also to exit from iso­la­tion in the EU. Is this a diplo­mat­ic success?

It’s a huge diplo­mat­ic suc­cess for the EU, which was able to pre­vent a divide in Euro­pean cohe­sion and make sure that Poland gets on board with the 2030 and 2050 objec­tives – with mea­sures that take its spe­cif­ic sit­u­a­tion into account, of course. Nuclear is an effec­tive solu­tion to allow Poland to pro­gres­sive­ly close its coal-fired pow­er sta­tions, in con­junc­tion with wind, ener­gy effi­cien­cy, and elec­tric­i­ty inter­con­nec­tions. Germany’s anti-nuclear stance seems com­plete­ly out­dat­ed and prob­lem­at­ic. Can Berlin real­ly ask Poland to fol­low its extra­or­di­nar­i­ly cost­ly and inef­fi­cient Energiewende model?

Will some coun­tries suf­fer from this car­bon diplomacy?

There are four kinds of coun­tries in the world when it comes to the cli­mate – big emit­ters, both his­tor­i­cal­ly and per capi­ta (the US, fol­lowed by Chi­na, Europe, Rus­sia, and Japan); new big emit­ters (devel­op­ing coun­tries with low emis­sions his­tor­i­cal­ly and per capi­ta, such as India and Brazil); coun­tries with low his­toric emis­sions but huge emis­sions per capi­ta (the Mid­dle East); and all those that have prac­ti­cal­ly zero emis­sions and will be the most impact­ed by cli­mate change (such as Sub-Saha­ran Africa). Obvi­ous­ly, the first group must do more than the oth­ers, and faster, while help­ing the most vulnerable. 

Devel­op­ing coun­tries, such as India, also need to reduce the car­bon foot­print of their econ­o­my, but they can­not cut their emis­sions as fast as oth­er coun­tries. They need to be sup­port­ed in their efforts. Final­ly, those with the high­est emis­sions that do not com­mit strong­ly enough must be sub­ject to incre­men­tal restric­tions and pres­sure. A par­a­digm shift is tak­ing place – Aus­tralia is grow­ing more iso­lat­ed, as are, to a less­er extent, Rus­sia, Sau­di Ara­bia, Turkey, and Brazil. With the devel­op­ment of coer­cive cli­mate mea­sures (trade, car­bon pric­ing, devel­op­ment aid), green fund­ing and poten­tial boy­cotts, these coun­tries should think again about the pros and cons, and fall in line with the evidence.