Christoph Hardt/Geisler-Fotopres/picture-alliance/dpa/AP Images
The RWE Niederaussem power plant in North Rhine-Westphalia, Germany, July 2020
Industrial policy has officially arrived at COP26. Speaking at a climate summit forum last week, European Commission President Ursula von der Leyen shocked conference attendees with an unexpected announcement: “We will … now introduce, slowly but surely, a carbon border adjustment mechanism that says if you come with dirty products on our market, you have to pay a price.” With little happening on climate cooperation, the Europeans are adopting a unilateral approach to punish countries that rely on the fossil fuels that increase carbon emissions.
Going it alone is one of the biggest fears of the European Union and the United States in the fight against climate change. If they continue to reduce emissions at home while the rest of the world fails to follow suit, Western economies will lose good jobs and global emissions will continue to rise. Those concerns have already been borne out in the last few years. As Europe and America have modestly reduced their emissions, global emissions have increased primarily thanks to China, India, and other emerging Asian economies.
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Leading up to COP26, Western governments have prioritized reducing emissions and protecting their manufacturing jobs from being poached by countries with more lax climate regulations. This has hastened their embrace of a carbon border adjustment mechanism (CBAM), a system of tariffs designed to hit countries with weak environmental standards that export carbon-intensive goods. The framework aims to incentivize polluters to adopt greener production methods and prevent firms from outsourcing good-paying but pollution-heavy jobs to countries with less stringent environmental protections. For countries with relatively green economies, it’s billed as a win-win. Both global emissions and domestic job loss will taper off with time.
A CBAM was not initially slated to be up for discussion at COP26. But that has not stopped the policy from being central to European and American efforts to reduce global emissions. While the global debate over reducing carbon emissions has certainly become more contentious after von der Leyen’s announcement, the EU move shows how one bloc of developed countries is ready to dial up economic pressure on the countries, mostly in the developing world, that are lagging behind in their commitments.
In March, the European Parliament adopted the first CBAM plan in a nonbinding resolution. It applies to emissions created as a direct result of oil refining or the production of cement, iron, steel, aluminum, fertilizers, and electricity, among other goods. These tariffs would begin in 2023 and apply to countries that enforce less strict environmental standards than the European Union. They would be large enough that firms exporting goods to the EU would face the same imposed costs as producers in Europe.
The fate of the least developed countries (LDCs) in this arrangement is unclear. They could receive some form of “special treatment” to protect their exporters from crippling tariffs, but it is unknown whether this means a phase-in period or a partial or full exemption from the CBAM. America’s treatment under the CBAM is also in limbo. U.S. Trade Representative Katherine Tai has made it clear that she has not ruled out the use of retaliatory tariffs if the European CBAM applies to American goods. This has led the Europeans to suggest that the U.S. could be exempt from their CBAM because of its pledge to go carbon-neutral by 2050, an exemption that does not apply to the rest of the world.
Yet it’s less well known that the U.S. also has its own CBAM framework. The American plan is far more flexible, which allows the CBAM to operate as a discriminatory tariff—and as a calculated tool of American industrial policy. The plan, dubbed the FAIR Transition and Competition Act, is sponsored by Sen. Chris Coons (D-DE) and is similar to the European plan but outlines the precise parameters for granting exemptions to the CBAM. There is an explicit exemption for all LDCs and an exemption for countries that do not impose a CBAM against the U.S. and take measures that are “at least as ambitious” as U.S. greenhouse gas emissions regulations. Aside from India and China, it is difficult to parse out which countries would be subject to the American CBAM. U.S. trade officials would be tasked with sorting out those details.
Any CBAM plan has the potential to keep thousands of jobs in America and Europe, but plans that cover more countries are likely to do more to protect American jobs and reduce global emissions. For example, if duties are placed on carbon-intensive goods from China but not Indonesia, that move might not do Americans or the Earth much good. A 2014 meta-analysis of CBAM studies found that the tariffs could reduce carbon offshoring by 6 percent on average.
But the possible benefits of any CBAM policy are not a given. Since the CBAM only applies to goods that cross borders, clever firms in industrialized countries could dodge the tariffs entirely by using their dirty technology for domestic consumption while using clean technology to produce exports, a technique economists call “resource shuffling.” China could easily pull off these tactics to avoid CBAM: 99 percent of China’s cement and 87 percent of its steel are consumed domestically.
The EU move shows how one bloc of developed countries is ready to dial up economic pressure on the countries that are lagging behind in their commitments.
There is also the possibility that tariffs do not produce increased investment in greener technologies. Poorer countries may be unable to afford expensive green capital stock, like solar panels and hydroelectric facilities, rendering the CBAM simply a punishment for being poor—a bad look, as the developed world has failed to give even a fraction of the $100 billion promised to LDCs under the Paris Agreement to help green their production techniques. And CBAM could also run afoul of the World Trade Organization’s prohibitions on discriminatory tariffs, depending on the version countries adopt.
The Like-Minded Developing Countries, a negotiating bloc that includes China, India, Indonesia, Syria, Vietnam, and others, released a statement in October registering their opposition, calling CBAM coercive, discriminatory, and “detrimental to multilateral cooperation.” They are unlikely to take European efforts at implementing a CBAM on the chin and may be inclined to enact retaliatory tariffs.
Some countries, like China, can certainly afford greener infrastructure, but it’s unclear whether a CBAM would help speed up adoption rates. The CBAM only incentivizes change if there is a genuine belief that America and Europe would lift the tariffs if countries show improvement. If countries see the CBAM as a tool of Western protectionism—which is exactly how much of the non-Western world views it—and countries affected by the tariff do not get relief as they shift to greener technology, it will do very little to limit emissions. This is the danger: Instead of reducing emissions, the CBAM could have the unintended consequence of aligning the interests of China and LDCs against the U.S. and Europe and further stifle cooperative efforts to mitigate the global threat of climate change.
But it doesn’t have to. There are other ways to make the CBAM part of a fair climate package. One idea, proposed by civil society groups like Carbon Market Watch and the Institute for European Environmental Policy, is to use the billions of dollars raised by the tariffs to invest in green technology in the developing world. If adopted, the American version of CBAM may generate about $15 billion in revenue. As part of a more comprehensive climate deal, the introduction of a CBAM could be accompanied by more ambitious pledges of green financing and development aid.
How might COP26 countries respond to the EU’s bold move, one that U.S. climate envoy John Kerry urged them to hold off on until after the conference? The EU will find out soon enough. The European Parliament has planned another forum at COP26 to discuss “the global context of the EU’s proposed Carbon Border Adjustment Mechanism.”
