A campaign led by French President Nicolas Sarkozy to introduce carbon tariffs at EU borders in order to restore fair competition with freely-polluting industries in China is being revamped in Brussels to allay fears that it might trigger a trade war.
The proposed system, called a "carbon inclusion mechanism," would require importers of goods manufactured outside Europe to buy pollution permits from the EU’s emissions trading scheme for carbon dioxide (EU-ETS).
French diplomats say the system would only be used as a last resort and should work as a lever to force emerging economies like China, India and Brazil back on the negotiating table after the failure of international climate talks in Copenhagen last year.
"The mechanism, which responds first and foremost to an environmental objective within the framework of the international negotiation on climate change, would seek only to preserve current competitive conditions" in industries such as steelmaking, reads a briefing note circulated by the French Permanent Representation to the EU in Brussels.
"From a technical point of view, it would not amount to a border tax."
To prove the proposal is not intended as a protectionist measure, Paris says the money could even be reserved to fund low-carbon technologies in developing countries.
Poor countries in Africa and elsewhere, which come under a different approach, would be exempted from the proposed mechanism.
The renewed push for an EU carbon tariff comes ahead of a European Commission proposal on 27 May that will explore the feasibility of raising the EU’s CO2 reduction target for 2020 from 20% to 30%.
French diplomats have started touring the European Commission’s services in order to win support for the proposal and convince policymakers that the system does not amount to protectionism.
They face an uphill battle in the EU executive’s trade directorate with Trade Commissioner Karel De Gucht having voiced strong opposition to the plan on the grounds that it would trigger a trade war with China: a concern echoed by the EU's climate action commissioner, Connie Hedegaard (EURACTIV 13/01/10).
The crusade is also being taken to the EU Council of Ministers – with Italy so far the only country openly supporting a carbon tariff – and the European Parliament, where Françoise Grossetête, a leading French centre-right MEP close to President Sarkozy, is leading the campaign.
The French can also count on the backing of European steel industry association Eurofer, which supports border adjustment measures "in addition to free allowances"under the revised EU-ETS "if the latter is not sufficient to restore a global level playing field".
An incentive for China?
The main argument for putting in place a "carbon inclusion mechanism"is that the EU's negotiating tactics, based on unilateral emission cuts and leadership by example, have so far failed to convince China and other major emitters to follow suit.
Worse, diplomats say, the EU’s unilateral approach to climate change has even had the perverse effect of rewarding China for refusing any internationally-binding emission cuts by making its own exports comparatively cheaper than European products.
"In fact, by taking a step back, you can say that [the EU] had a negative role against its own will, by telling implicitly to all these countries that if you don’t participate in the accord, if you don’t reduce your emissions sufficiently, you will have favourable access to the European market and additional investments through massive delocalisation," said an EU diplomat.
"This is absurd. On the contrary, we should instead be looking to create positive incentives and maintain the fair competition that we need."
Under the plan, emerging economies would be offered a partnership covering sectors such as steelmaking, aluminium and cement, which face increased international competition after 2013 and the tightening of the EU's emissions trading scheme (EU-ETS).
Those that sign up to the agreement would win access to low-carbon technologies and an exemption from the ETS. Those that do not would have to pay for the equivalent EU pollution permits. The mechanism would be applied to the country as a whole, or to the relevant sector or sectors.
According to the diplomat, this should act as an incentive for China and other heavy polluters to sign up to an international climate agreement. "We need this as a lever in the international negotiations," he said.
To avoid complex calculations, a "flat rate" approach to measuring the carbon content of imported products would be applied, taking average European emissions as a reference, says the briefing note.
Importers would then be asked to return the difference between the European average and the lower EU emissions target.
But it would not distort existing competition, the note says, because the difference in prices would remain.
After the system is applied, a product which costs €100 to produce in the EU and €70 elsewhere would be pushed up to €120 and €90 respectively, allowing the imported product to enjoy the same price difference when it enters the European market.
Price increases likely
Diplomats concede, however, that this would make the price of manufactured goods generally more expensive. But they argue this is the aim of any carbon pricing system.
"If an increase in the cost of imported products can be expected in the event of applying the mechanism, that would simply be the price signal which the European Union seeks to favour through the implementation of the revised ETS, by extending it to all products consumed in the European Union," the note says.
"It would be paradoxical for imported products to escape from the price signal, which is the cornerstone of European climate policy," it adds.