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.