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The European Union is poised to bring trade policy into the fight against climate change, a move that risks stoking global commercial tensions.
European Commission President-elect Ursula von der Leyen wants to craft a carbon border tariff for the EU, the world’s biggest single market, as part of a Green Deal to battle the more frequent heat waves, storms and floods tied to global warming.
The idea would unleash a major policy weapon that may well be too politically controversial to work. Even so, elevating the issue is likely to trigger a broader debate within the EU about how to protect domestic businesses from lower-cost competitors abroad. The bloc is weighing steps to zero out fossil fuel emissions by 2050 and wants to prod the rest of the world into similar actions to avoid heavy industry moving abroad.
Frans Timmermans, the designated EU climate czar who will take office on Nov. 1, said the EU should analyze introducing a carbon border tax. The goal would be to prevent European energy-intensive manufacturers such as steelmakers and oil refiners from relocating to countries outside the EU without emission curbs and spur green ambitions by other countries.
“The transition to a climate-neutral EU makes the issue of carbon leakage more relevant than ever,” Timmermans told a European Parliament confirmation hearing in Brussels on Oct. 8.
Europe aims to lead the fight against global warming, working with China to leave the U.S. politically isolated on the issue. Policy makers across Europe are upset President Donald Trump turned his back on the landmark 2015 Paris Agreement on climate change. They also want to harness economic benefits from a clean-energy revolution that would touch everything from transportation and agriculture to energy production and the design of cities.
The idea of an EU carbon border touches on two policy areas where the bloc has very different track records. Timmermans’ study of the matter shows the delicacy and difficulty of levying such a tax while complying with World Trade Organization standards designed to smooth the flow of goods and services across borders.
The EU generally speaks with a single voice on trade, and the daily management of European commercial policy is in the hands of the commission, the bloc’s executive arm. By contrast, tax matters generally remain a closely guarded responsibility of EU national governments, so any bloc-wide initiative in this field requires their unanimous approval.
The EU has a history of failed initiatives in the area of taxation, including much-touted 2011 proposals to establish a financial-transactions tax and to introduce an emissions-levy on industries excluded from the bloc’s carbon-dioxide caps.
The notion of a European carbon border tax faces a sizable hurdle posed by the EU’s unanimity rule on fiscal matters. Some of the bloc’s governments are also genuinely concerned about whether such a measure would be compatible with WTO rules, which the EU is keen to support in the face of Trump’s protectionist challenge to the global commercial order.
“Carbon border taxes have their merits, but are tough to sell politically,” said Antoine Vagneur-Jones, an analyst at BloombergNEF in London. “Implementing new border tariffs could exacerbate protectionism and trade wars.”
France has been leading the calls for such a European initiative, and von der Leyen owes her surprise nomination in July to fill the EU’s most powerful post in large part to French President Emmanuel Macron. That helps explain the prominence she has given to the idea.
Timmermans, who will be responsible for crafting the proposal, has so far given little away on the details. Von der Leyen pledged ensuring compatibility with global open-market rules.
“As an economic giant, we have tremendous leverage in our trade relations,” said Timmermans. “We can set global standards. We should use that leverage as best we can, combined with convincing arguments to show that at the end of the day, we can all be better off.”
With global supply chains crossing multiple countries, designing a European carbon tariff will be nothing if not technically complex.
“Carbon taxes on imports are a significant risk,” said Deirdre Cooper, who helps oversee clean investments at Investec Plc’s asset management division. She says the measure would encourage share and bond investors to focus not only on a company’s direct emissions, but the greenhouse gas it’s indirectly responsible for.
Politically, the push risks opening a new source of international trade tensions, with Trump threatening to hit European automotive goods to retaliate against support for Airbus SE.
Among the unknowns are the industries and products that would be covered by the upcoming commission proposal. Von der Leyen said in July that “it will start with a number of selected sectors and be gradually extended.”
Timmermans said the commission will need to take into account the relationship with the EU’s existing carbon-leakage measures, which include handing free permits to emit carbon dioxide to mostly energy-intensive companies deemed at risk of moving their production out of Europe.
After a surge in the cost of CO2-permit prices in the EU cap-and-trade market over the past few years, replacing free allowances in the market with a carbon tariff may discourage businesses currently rallying behind the tax.
EU national governments are signaling a readiness to consider the issue.
“We’re open to discussing the issue, but we see a lot of challenges related to any of such proposals,” said Karsten Sach, director general at the German Environment Ministry. “There are likely other options which are probably more effective and more in line with what a rules-based international trade system would look like.”
Such attitudes may well lead the EU down a path involving a less intrusive stick: setting minimum environmental standards for goods both made in the bloc and imported by it. Europe has deployed this approach in the area of renewable energy, setting sustainability criteria for biofuels including those made from palm oil in countries such as Indonesia in a bid to curb deforestation.
While subtler, this European method has plenty of political and economic impact. The Indonesian government has threatened to retaliate against the EU over its stricter limits on the use of palm oil in biofuels.
“Europe as the economic superpower needs to investigate and analyze all options,” said Norbert Kurilla, state secretary at the Slovak Environment Ministry.
