This article is part of our special report The EU’s carbon border adjustment mechanism.
The European Union’s future carbon border adjustment mechanism must mirror the EU’s own carbon market price and structure in order to be compatible with WTO rules, says Pascal Canfin.
Pascal Canfin is a French MEP for the centrist Renew Europe group in the European Parliament, where he chairs the assembly’s environment committee (ENVI). He spoke to EURACTIV’s energy and environment editor, Frédéric Simon. (To read the original interview in French, click here).
The European Commission has said it will apply a carbon border adjustment mechanism on countries that do not make sufficient commitments on climate change. How can the Commission determine what is sufficient? Would signing the Paris agreement, for example, be enough?
We must first go back to the objective of this measure. What we want in the European Parliament is a mechanism which mirrors the ETS – the EU carbon market – and which is therefore adopted by qualified majority. A tax would have to be approved by unanimity, which would complicate decision making. It would also risk being rejected by the WTO as a protectionist measure.
By contrast, the border adjustment mechanism that we want to put in place could be technically integrated into the ETS, there are several ways of doing that.
The second thing we want to avoid is “carbon leakage” whereby industries shift their production to countries where CO2 emissions are not priced. The sectors most affected are well-known, chiefly steel and cement.
What we want is a level playing field – but compared to what? European steel and cement producers are already facing additional production costs linked to the carbon constraint imposed on them by the ETS. These constraints will only increase with the EU’s new climate targets for 2030.
Faced with these very real constraints, we have to compare with what other countries are doing. This is the question we must ask ourselves.
If on the opposite side, we have political commitments for 2060, that is not good enough. This is what China has done. Even though I welcome this political commitment, at present China does not impose a carbon price on steel production, for example.
Therefore, exempting China on the sole basis of this political commitment would not be serious. If I put myself in the shoes of a European steel or cement producer, I would not accept it. It doesn’t solve the short-term problem.
How could an industrial sector in a country like China escape the future European mechanism?
The only two tools that can be objectified – and compatible with the WTO – is either an explicit price on carbon emissions, like we have in Europe with the ETS, or an equivalent price in terms of standards.
The concrete commitment that can be objectified is the price of carbon. In the future European mechanism, it will act as a lock by adjusting the cost in relation to an equivalent: for example standards at sectoral level. A standard is equivalent to an implicit carbon price. To achieve a certain level of performance, it allows determining which carbon price would have to be applied.
And to escape the future European mechanism, it would be necessary to demonstrate that a carbon price has indeed been applied to the sector concerned?
Yes of course. Otherwise, what would that mean? If we are satisfied with declarations of intentions that do not translate into facts, we would not protect our manufacturers from climate dumping.
Coming back to China, while its commitments are laudable from a diplomatic point of view, it is of no value from the point of view of industrial competition. Of course, I am delighted that China has made this commitment. But to escape the future European carbon borer adjustment mechanism, it has to be translated into reality. Otherwise, it is not concrete.
And among the tools to measure these commitments, there is only the carbon price or the equivalent in terms of standards.
How can we precisely quantify the carbon cost imposed on an industrialist in a foreign country? What elements of proof will they have to provide?
It’s quite simple, there are several options that we have already started discussing in the European Parliament. For example, we can take the electricity mix of the country, that of the group targeted by the mechanism, or the electricity mix of the production site itself. That remains to be seen.
But this information is very easily traceable. If you choose the country’s electricity mix, this is easily available information, and if it is a company’s site that is targeted, there are contracts and invoices, so it’s very simple.
Then this should be applied to the carbon content of the products you import. If, for example, we have an electricity mix with a given CO2 intensity “x” and a carbon content “y”, we make a simple proportional calculation and apply a price. The resulting price would be Europe’s carbon price minus what might have already been paid locally. From that moment, we then have a level playing field.
The next question is what to do with the income generated by this adjustment mechanism. And there are basically two logics, two ways of approaching this that we must reconcile.
The first is the environmental logic according to which part of the revenue would go to finance the ecological transition of the countries concerned, especially the poorest countries. The second logic is that part of the income goes to finance the repayment of the European recovery plan – or parts of it, probably the green chapter.
In the end, it will be necessary to find the right compromise between these two logics so that the mechanism is WTO-compatible. If the proceeds only go towards the EU recovery plan, without traceability, with no environmental objectives and without any returns to certain countries, especially the poorest, I think we have to be concerned.
So there will have to be a balance between the two and I will work on it on my side in Parliament.
The biggest steel producers are multinationals with production sites in several countries. How can the carbon border adjustment mechanism be applied to this type of globalised group without penalising production sites located in Europe? I am thinking for example of ArcelorMittal.
It is precisely the opposite: if Europe increases the price of carbon without putting in place a mechanism that prevents climate dumping, then a foreign production site will automatically become more competitive than a European production site of the same group.
And so without a carbon border adjustment mechanism, there is precisely a risk of carbon leakage and relocation of production outside the EU. This would be doubly counterproductive – first from an economic and industrial point of view, and secondly from an environmental point of view because we would relocate production to countries which have lower environmental standards than us. So it’s a double loss, that’s precisely what we want to avoid.
It is also for this reason that the compatibility of the mechanism with WTO rules is essential: we do not want to enter into a trade war under any circumstances. I recently had discussions with Chinese officials on the subject as well as with the new US administration.
The message must be clear: Europe is not entering a logic of green protectionism or trade war. The mechanism we are proposing is neither arbitrary nor unilateral – on the contrary, we want it to be compatible with the WTO. And as long as it is compatible with the WTO, it is also compatible with the rules that we have set ourselves at European level, and that the Chinese and Americans have accepted.
So rather than starting a trade war, on the contrary, we are playing the game of multilateralism.
What is WTO-compatibility based on exactly? Is it based on the fact that the mechanism is linked to the price of carbon on the ETS?
Indeed, one of the elements is that the structure of the mechanism must be as close as possible to the EU carbon market. The fact that this is not a tax, and that it applies to both European and imported products, are essential and favourable elements here with regards to the WTO.
The second element is the purpose of the mechanism: if the aim is to protect the environment, and the legal basis is linked to environmental objectives, we demonstrate to the WTO that the mechanism is linked to a climate goal that is recognised by the WTO and not linked to customs duties which are aimed at financing other objectives.
The heart of WTO compatibility is that the scope must mirror the ETS mechanism. And that raises the question of free CO2 quotas for European manufacturers because we cannot have both border protection and free quotas.
This is where a smart adjustment will have to be found, for example by phasing out free quotas at the same time as the border adjustment mechanism is being put in place. The same tonne of carbon emitted by a European installation cannot be covered both by the carbon border adjustment mechanism and by free allowances because this would be a double compensation that is not compatible with the WTO.
In any case, WTO compatibility is a total red line: without it, we are entering a trade war logic and there will be no majority in the European Parliament to support the mechanism.
[Edited by Zoran Radosavljevic]