The US Wants the EU to Delay Imposing Trade Penalties on Carbon-Intensive Imports, But Is Considering Imposing Its Own

Even when nations have agreed to act on climate—as they have in the Paris accord—a kind of stalemate continues.

The reason: A prevailing view that the laggards will enjoy an economic advantage over the leaders that have burdened their domestic industry with the cost of cutting carbon pollution. That thinking led President Donald Trump to exit the Paris agreement, and it is certain to fuel political opposition to President Joe Biden as he brings the United States back into the fold.

Economists have long suggested that there’s a way to break that global impasse—and that’s to treat carbon like any other international trade dispute. Impose tariffs or quotas on imports from countries that have given their manufacturers an unfair advantage of uncontrolled carbon emissions. The promise of so-called “border carbon adjustments,” an idea which has won support across the industry, labor and environmental communities, is that it will erase the advantage of delay. The most hopeful advocates argue that the marriage of climate and trade will catalyze action.

Now, for the first time, nations are planning to make the idea of border carbon adjustments a reality. The European Union Parliament voted overwhelmingly on March 10 in favor of a resolution to create a border adjustment mechanism to protect its manufacturers against cheaper imports from countries with weaker climate policy.

It will not happen right away—the European Commission is expected to hammer out a legislative proposal by June for an adjustment system that would go into effect in 2023. But already, the move by the 27-nation European bloc—the world’s third largest contributor to greenhouse gas emissions—has shaken up the international climate discussion, and has become a top diplomacy issue for U.S. Special Presidential Envoy for Climate John Kerry.

In an interview with The Financial Times last week, Kerry expressed “concern” over the EU plan and said he was urging a delay until after the next round of international climate talks, currently scheduled for November in Glasgow. But it’s a touchy subject, not only because the U.S. does more trade with the EU—$650 billion in goods last year—than with any other single nation. Part of the Biden climate plan is for the United States to impose its own system of carbon border adjustments once the nation has taken steps to cut greenhouse gas emissions. Another close trading partner and ally, Canada, also is looking at the idea. So Kerry can’t oppose the idea of carbon border adjustments, only the timing.

A State Department spokesman said Friday that the EU has committed to consult with the U.S. government before its proposal is made public. “We look forward to exchanging views as soon as possible,” the spokesman said. 

Some climate action advocates look at the dust-up as a sign of genuine movement on climate.

“John Kerry’s comments and the movement in the EU, and Canada, and the signaling from the Biden administration around border adjustment mechanisms all reflect a reckoning about the role of trade and climate policy working together,” said Catrina Rorke, vice president for policy for the Climate Leadership Council, an industry-environmentalist coalition that has been advocating for the U.S. to adopt a carbon tax coupled with other policies like border adjustments. “The U.S. 100 percent absolutely stands to benefit if we take on a leadership role in framing the sort of new paradigm about international trade being more considerate about climate priorities,” said Rorke.

For the Biden administration, the diplomatic and political challenge is that the converse is also true. If nations begin treating climate as a trade issue, the United States stands to lose if we are slow to act.

‘This Domino Effect Could Start Anywhere’

One of the most enthusiastic visions of carbon as a trade issue came in a 2017 TED talk by the late social entrepreneur and climate advocate Ted Halstead, founder of the Climate Leadership Council. He described carbon border adjustments as a potentially revolutionary tool to induce an increasing number of countries to act on climate in a “domino effect” when such tariffs are paired with domestic carbon taxes and all revenue is returned to households in the form of dividends.

“Once one major country or region adopts carbon dividends with border carbon adjustments, other countries are compelled to follow suit,” Halstead said. “One by one the dominoes fall.”  Halstead, who died last year at the age of 52 in a hiking accident, said he wanted the United States to be the first domino. But in words that would prove prescient, he added, “This domino effect could start anywhere.”

Ironically, Trump set the stage for the European Union to be the first domino, with both his climate policy retreat and his aggressive stand on trade, in some cases slapping tariffs of up to 50 percent on goods. “As the overall trade policy climate deteriorated, national interest rose and the EU had to give in to this trend of nationalism without wanting to,” said Susanne Dröge, a policy analyst at the German Institute for International and Security Affairs in Berlin.

The idea of imposing trade penalties on carbon-intensive goods had been floating around the European Union since at least 2007, when France first made a concrete proposal as part of an update to the internal EU carbon trading system. And in the United States, the ill-fated cap-and-trade bill passed by the House in 2009, the first year of President Barack Obama’s administration, would have triggered border adjustments if the protections already included for carbon-intensive, trade-exposed industries like steel, aluminum and cement proved insufficient.

But the idea of border carbon adjustments did not have momentum until nations faced the combined pressure of deteriorating trade relationships, the economic shock of Covid-19 and the imperative for deep decarbonization. France and Germany got the ball rolling by folding a border carbon adjustment into the European plan for a green recovery from the coronavirus pandemic, with revenues from the carbon tax earmarked for sustainable low carbon investments. It’s part of what has become known as the European Green Deal, the continent’s effort to become the first carbon-neutral block by 2050.

“The EU has actually come to this with a lot of hesitation,” said Carolyn Fischer, an economist and senior fellow with the Washington, D.C.-based think tank, Resources for the Future. “But they’re coming to realize that with their very ambitious targets… to maintain a level playing field, they are finally looking more toward border carbon adjustments, at least for a few important sectors.”

At this stage, Dröge said the EU is discussing carbon border adjustments for three key sectors: cement, steel and electricity production. The idea is to stop “carbon leakage”—for example, steel production moving from a country with a high price on carbon to a country with a low, or no carbon price. For example, any purchaser of steel produced in the EU would be paying the European carbon price—40 Euros (about $48) per ton of carbon dioxide generated in its manufacture, but could avoid that cost by buying steel produced from a country with no carbon pricing. However, if tariffs or other trade instruments, like quotas, are imposed on that imported steel, it levels the playing field for domestic producers and ensures that emissions reductions actually take place.

“It sends a clear message,” said Mohammed Chahim, a Member of the European Parliament from the Netherlands with the Progressive Alliance of Socialists and Democrats. “If you want to enter the EU market you have to meet our standards. This will lower global CO2 emissions.”

The border carbon adjustment is an important step away from climate-harming business-as-usual trade, said MEP Karin Karlsbro, of Sweden’s liberal party, who serves in the parliament’s trade committee. 

“We’re not trying to get at our trade partners, we’re trying to get at emissions,” she said. “The time that we can have trade as usual has elapsed. Trade has to be sustainable. We have to make sure manufacturers pay for carbon emissions wherever they take place.”

Support From Environmentalists to Unions, But Rarely From Republicans

Those views expressed during the European Parliament debate on the resolution sounded a lot like the message coming from the Biden administration. “President Biden has put forward the most ambitious climate plan in U.S. history and made it clear that U.S. businesses will not be disadvantaged as they move to reduce emissions,” a State Department spokesman said. He said key actors across the U.S. government, including Kerry and the U.S. Trade Representative, would be in close coordination regarding an approach to trade “that is aligned with continually increasing global climate ambition.”

Biden’s climate plan put it this way: “We can no longer separate trade policy from our climate objectives.”

The roadmap for putting the United States on a path to zero net carbon emissions by 2050 mentions China in particular, and says that as president, Biden would not allow nations “to game the system by becoming destination economies for polluters, undermining our climate efforts and exploiting American workers and businesses.

“As the U.S. takes steps to make domestic polluters bear the full cost of their carbon pollution, the Biden Administration will impose carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations,” the plan said.

That declaration was a welcome inclusion in the package from the point of view of labor, one of the constituencies that was key to Biden’s victory.

“Our union has been working on the idea of a carbon border measure for probably two decades,” said Anna Fendley, director of regulatory policy for the United Steelworkers, whose 1.2 million members include a high percentage of workers in carbon-intensive industries that are concerned about carbon leakage.

Fendley cites research showing that even without a national climate policy, steel in the United States is produced with two-thirds of the energy and less than half of the carbon dioxide emissions than steel in China. That’s why she and others say that U.S. industry stands to gain from imposition of carbon adjustments at the U.S. border that assess a penalty on their more carbon-intensive competitors from overseas.

“Border carbon adjustments keep me up at night, because they’re really complicated, and also because I think they’re so exciting,” said Rorke of the Climate Leadership Council, a coalition of industry groups, including some of the biggest oil companies, as well as environmental advocacy groups. “For the last 15 years, the climate conversation has been held up by a perception that ambitious domestic climate action will cause economic pain, will cost us competitiveness, and we’ll lose jobs. Yet, I think that understanding is just so misaligned, from what we know now about the carbon advantage for U.S. manufacturing.”

Fendley said the United Steelworkers would like to see border carbon adjustments that reflect the implicit cost of U.S. government action on greenhouse gas emissions, especially given that the Biden administration is considering a climate policy that is heavy on government regulation and standards. But legal experts warn that could run afoul of World Trade Organization rules. In order to impose a border carbon adjustment that will pass muster under the WTO, they argue the U.S. would have to be subjecting its domestic industry to the same cost—and that almost surely means that Congress would need to approve a domestic carbon tax before carbon tariffs or quotas could be imposed on imports.

Carbon taxes face considerable political opposition in the United States, with all 50 Republican members of the Senate voting in February in favor of a budget amendment that would have banned them. And although the post-Trump GOP can no longer claim to embrace free trade as a guiding principle, some leading voices in the party remain adamantly opposed to  tariffs or quotas of any kind. Koch Industries, the petrochemical powerhouse that has funded opposition to climate action for years, lobbied decisively in 2016 to derail a short-lived effort by House Republicans to enact hefty border adjustments unrelated to climate in a tax reform effort.

Politically Contentious in the EU Too 

As the Biden administration works to get its own climate policy enacted, it may get its wish that the European Union delay action on carbon border adjustments, if only because the subject is just as politically contentious on the other side of the Atlantic. Nationalistic right wing voices—who are gaining ground in many countries—were leading the opposition in the debate over the resolution in Parliament, and they no doubt will be heard again as Parliament works out the details of a plan.

“The EU wants to be a laboratory to test the ecologist’s agenda,” said Catherine Griset, with the French National Rally and the European Union Parliament Identity and Democracy Group. “We keep trying to export our model and put in more and more constraints on trade.”

Finland’s Laura Huhtasaari, also of the rightwing Identity and Democracy Group, said she was concerned that people in Finland might have to pay a carbon tax on the wood they burn to heat their saunas.

Of course that’s not the case, said Georg Zachmann, a climate economist with Bruegel, a Brussels-based think tank, but he thinks there are better ways to reduce emissions to meet the European Union’s ambitious 2030 and 2050 targets.

“My take on the border carbon adjustment is that it’s only relevant for a few sectors,” he said. “If you address them more with a green bonus, rather than punishing brown imports, you would get closer to what you really want, which is investment in green technology.”

Another peril in the discussion of border carbon adjustments is that it will amp up conflict among nations just as the world’s second-largest carbon emitter, the United States, is reengaging in the Paris climate accord and pledging to work for greater ambition from all nations, said Randy Bell, director of the Global Energy Center for the Atlantic Council, an international affairs think tank based in Washington, D.C.

“What you’re doing is combining two of the most difficult international policy issues—trade and climate,” he said. “You can imagine countries like India retaliating and ultimately not being part of the solution because they feel like they’re being penalized. So there are a lot of potential negative repercussions. If they aren’t thought through, then then you could actually do more harm than good.”

If nothing else, the EU push on border adjustments has increased the urgency around global talks on carbon action. It undoubtedly will be a topic for discussion at the summit of major carbon-emitting nations that the Biden administration is organizing for Earth Day—April 22.

“Europe seems to have given momentum to a global discussion on decarbonization,” Zachmann said, while noting the risk of overreach that escalates tension with the other major emitters, like the U.S., the Russians, and the Chinese. The difficult part, he said, is “to give a soft push for others, to have a veiled threat that something might come, but watch out to not escalate into global trade mayhem.”