EU carbon border tax: How a French idea ended up in the limelight

shutterstock_1044130699 [Alexandros Michailidis/shutterstock]

Since Jacques Chirac first proposed a carbon border tax, French presidents have never let go of the idea. Now, the European Commission plans to integrate it into its recovery plan, much to the irritation of Beijing, just as an EU-China summit opens on Monday (14 September). EURACTIV France reports.

Although China, Russia and the US have made it known that they oppose a carbon border tax, the EU has already decided.

European Commission President Ursula von der Leyen has outlined the tax as “a key tool” to “ensure that EU companies can compete on a level playing field” with countries like China, which don’t regulate CO2 emissions from industry.

“I know that it is not an easy part, but it is something that we have to take on,” she said as she announced her flagship European Green Deal initiative last year in front of the European Parliament.

Although they were initially reluctant when the idea was first floated 15 years ago, European governments have since warmed to the concept, prompted by China’s continued environmental dumping on EU markets and the US decision to withdraw from the Paris Agreement on climate change.

“We will not accept that environmentally substandard goods unfairly compete with European products, while at the same time damaging the planet,” European Council President Charles Michel told the Brussels economic forum on 8 September. “We are ready to establish a carbon border adjustment mechanism in line with an improved emissions trading system to protect our level-playing field,” he added.

The European Commission is now expected to present a legislative proposal as early as the second quarter of 2021, as part of the Green Deal.

The aim of the “border carbon adjustment mechanisms” is to limit “carbon leakage” resulting from the relocation of industries to countries with less ambitious climate policies, the Economic Council for Sustainable Development said in a summary note.

The carbon border tax is increasingly seen as necessary since the EU has agreed to press on with higher climate targets for 2030, and aim for net-zero emissions by mid-century. With a higher carbon constraint, Europe’s industrial competitiveness risks deteriorating even further compared to major trading partners such as China and the US.

Besides, “the Commission will have to progressively increase its own resources” in order to finance the EU’s €750 billion recovery plan from the coronavirus crisis, said EU Internal Market Commissioner Thierry Breton.

Initially proposed by former French President Jacques Chirac and taken up by the conclusions of the Grenelle Environment Forum in 2007, the proposal was then championed by President Nicolas Sarkozy, who declared that “those who produce dirty must pay”.

Though the proposal failed to convince France’s EU partners, President François Hollande brought it up again, with little success. After that, Emmanuel Macron continued to defend this position to the point that Brussels has now taken the idea on board.

BusinessEurope warms to Macron’s EU carbon tariff idea

Marking a departure from its existing policy, Europe’s biggest business lobby group said it was discussing a carbon tariff at the EU’s border in order to restore a level playing field with countries like China or the US, which do not impose a pollution constraint on their industries.

A powerful Europe, a French idea  

“We are reaching a point where certain French ideas are more accepted in Europe. This is the case, for example, with strategic autonomy, industrial sovereignty and the carbon tax,” Eric Maurice, the manager of the Brussels office at the Robert Schuman Foundation, told EURACTIV France.

“The carbon border tax allows Europe to assert itself and show it is defending itself against climate dumping. There are two logics: that of the Green Deal and that of trade defence,” the European affairs expert said, adding that the principle of a carbon tax at the borders is to prevent unfair competition.

For Maurice, the discussion on the application of an EU carbon border tax is part of a broader geopolitical context in which the EU is becoming aware of its strategic interests.

“It is no longer a question of putting commercial interests first,” he said, pointing to the end of “European naivety”, particularly with regard to its relations with China.

However, to assume a powerful Europe “which does not apologise for its existence and realises that its destiny cannot and must not be delegated to external powers” – to use the words of French European Affairs Minister Clément Beaune – means to embrace a French idea, Maurice stressed.

EU carbon border tax cheaper and fairer than French energy levy, says report

The European Commission’s carbon border tax proposal would have a small impact on French households, unlike the country’s own proposal to tax energy which prompted the birth of the ‘gilets jaunes’ movement. EURACTIV France reports.

A proposal that remains fuzzy

Nevertheless, the details of this mechanism remain blurred.

“We are at work,” said Yannick Jadot (Greens), who is also acting as the European Parliament’s rapporteur for the carbon border tax.

“The EU is putting its credibility and legitimacy at stake in the fight against climate change and the transformation of our economic model,” he told an intense informal meeting of the European Economic and Social Committee’s Consultative Commission on Industrial Change (CCMI) on 2 September.

For its part, the European Commission launched a public consultation on 22 July, which remains open until 28 October.

The list of options mentioned in the Commission’s questionnaire is long and includes: customs duties applied to certain carbon-intensive products or sectors; an extension of the European carbon market to imports; the purchase of allowances outside the EU carbon market; and an excise duty or VAT on the consumption of imported products.

The consultation also addresses the type of emissions that could be taken into account: whether direct or indirect emissions linked to the electricity used for production, and taking into account emissions linked to the transport of products.

Persistent German reticence

However, there is still serious German reluctance to overcome.

Although Macron and German Chancellor Angela Merkel had presented it together as part of their proposal for a stimulus fund in mid-May, there is no unanimity on the subject across the Rhine.

“Intellectually, the concept is great, but it still needs to be put in place. It has to be done in such a way that the carbon tax at the borders is manageable for our economy,” Philipp Steinberg, director-general for economic policy at the German economy ministry, told a discussion organised in Berlin in February by the energy dialogue platform “Forum für Zukunftsenergien”.

Steinberg specified that the government was in the process of evaluating several models of how to apply the carbon border tax.

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For their part, the German Federation of Savings Banks, the Sparkassen, which are the backbone of the national economy, is less diplomatic. In a study, it stated that it sees “serious problems of feasibility, fairness and efficiency”.

While the carbon border tax can effectively combat carbon leakage, its implementation is complex, “and it is unclear how it would comply with existing trade rules,” the economists pointed out. It is also unlikely that substantial tax revenues can be expected from the mechanism, according to their study.

Worse, issues with calculating the carbon content of products is “only a small part of the problem,” warning that foreign businesses could develop ways to circumvent the tax. Nor is it clear, according to the report, whether the mechanism can be implemented in a way that complies with existing WTO rules, which could at worst, turn into a net loss for national budgets.

According to Nicolas Berghmans, energy-climate policy researcher at the Institute for Sustainable Development and International Relations (IDDRI), the carbon border tax should be seen as one of the elements of an ambitious policy to decarbonise industrial sectors.

“But we must be careful not to make the decarbonisation of industrial sectors conditional on the implementation of this tax, which is complex and uncertain because of technical, regulatory and political obstacles,” he warned.

Berghmans also suggests that the EU and its member states should in parallel deploy policies to support the creation of a market for disruptive low-carbon innovations in industry, which would take the form of “contracts for difference”, indexed to a high carbon price, or preferential market access for low-carbon products and materials.

While certain trading partners consider the prospect of a carbon border tax to be some kind of protectionist move, it could, according to the researcher, also serve as a catalyst for a global discussion on the decarbonisation of certain high-emitting industries whose progress on the climate front is currently very weak throughout the world.

“Once its proposal has been clarified, the EU should reach out to its trading partners and propose cooperation for the decarbonisation of the industrial sectors concerned as credible alternatives to the application of the tax,” said Berghmans.

Why Europe should champion a carbon border tax

Building a carbon wall around Europe is instrumental to the success of the European Green Deal, and the EU should move forward without delay, argues Auke Lont.

(Edited by Frédéric Simon)

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