Sustainable development has been one of the chore values of the European Union (EU) in recent years thanks to a more powerful involvement of the European Parliament (EP) and the citizens’ raising awareness of issues such as climate change, deforestation and carbon emissions. However, trade policy has always given the impression of being outside of this development, appearing like a “bureaucrat to bureaucrat” policy area (1). The veto power of the Parliament on trade agreements is seen for instance not as threat but as an easy challenge to pass, as long as during trade negotiations the EP is involved, informed and the European values are respected (2).
Yet sustainable development has been more referenced in trade policy debates in recent years. A sustainable development chapter is now visible in modern trade agreements with third countries, as well as references to multilateral environmental agreements such as the Paris Agreement of 2015. The recent negotiations on the TTIP, CETA or the EU – Mercosur trade agreement have increased the public awareness on the issue.
However, as shown with the ratification of trade agreements with Vietnam, on the pursue or more joint regulations with the United States and Mexico and the investment partnership with China, these normative constraints have not blocked the European Union’s trade policy. This policy area still appears to be conducted in an autonomous way, sometimes in contradiction to other public policies of the EU (3). The Union, trapped in a will to liberalise the economy at all costs, does not seem to use as it should, its weight in international trade to “green” the world economy.
The recent Covid crisis, coupled with the United States and China’s increased protectionist rhetoric, has brought the EU to raise this flagship component of its external policy (4). The European Union very much still believes in international trade, one of the EU “raison d’être” (5) and has high hopes for it to ensure its post-Covid recovery and the normalisation of trade flows. Yet at the same time, due to growing concerns within the European population and its limitations in other areas of foreign affairs, the EU intends to use trade to align the world economy with its values and in particular, sustainable development (6).
With its colossal market position, its 500 million inhabitants and its 40 years of negotiating trade agreements, the EU believes that this policy area remains its best asset in economic diplomacy (7).
This brings us to the European Green Deal, announced in December 2019 (8). In the referenced document, the Commission addresses the lack of ambitions of foreign partners on the European Union’s environmental crusade.
In order to put pressure on its trade partners, the European Commission suggested the creation of a carbon border adjustment mechanism, to tax the carbon emissions of products coming into the EU. “Trade Policy can support the EU’s ecological transition”, says the Green Deal, by creating “economic incentives for climate action”.
This would furthermore comply with the new ambitions of the Commission to reduce its carbon emissions by 55% in 2030 compared to its 1990 levels (32). This flagship idea of the Commission for the Green Deal - the carbon border adjustment mechanism (CBAM) - could fight efficiently carbon leakage(I).
This popular measure also has a geopolitical impact; in a multilateral world, the EU cannot act alone on the issue and should convince its most normatively close partners, as well as the economic superpowers, while being World Trade Organisation (WTO) compliant (II).
Despite a decrease in greenhouse gases emissions by 13% between 1995 and 2016, the carbon footprint of the 28 member states of the European Union has only reduced by 8%. This is mainly because the Union is a net importer of carbon: a third of its carbon footprint comes from the products the EU imports (3). Moreover, the EU’s importations have various negative impacts for the environment; responsible for instance for a third of the deforestation linked to international trade (9). There are progresses in internal environmental policies, but the Union has not managed to control the global emissions coming from its importations and as a result, data shows that the emissions embodied in imported goods is nearly equivalent to the ones that the EU has reduced from production sources in the continent (10).
This is partly because of carbon leakage. Here is what the European Commission says about it in the Green Deal:
“As long as many international partners do not share the same ambition as the EU, there is a risk of carbon leakage, either because production is transferred from the EU to other countries with lower ambition for emission reduction, or because EU products are replaced by more carbon-intensive imports. If this risk materialises, there will be no reduction in global emissions, and this will frustrate the efforts of the EU and its industries to meet the global climate objectives of the Paris Agreement.” (8)
Carbon leakage is a technical term referring to the phenomenon of the dis- placement of pollution. If one country, or a group of countries such as the European Union, creates or increases tax on carbon emissions, industries will be more prompt to relocate their chains of productions in countries with less stringent carbon reduction policies. Although debates still exist on the extent of this leakage in the EU (11), many argue that the Emission Trading System (ETS), under which EU manufacturers have to pay CO2 prices, has created an incentive for companies to export their production (12). It creates environmental dumping: the poorest regions are more affected by the carbon emissions and the products imported have a strong carbon footprint (13).
Taxing emissions creates this direct carbon leakage, but also an indirect car- bon leakage, caused by the decreasing amount of fossil energy used by the countries with more stringent policy.Indeed, with less fossil energies used, the price of these polluting energies will decrease and make it more affordable for non-constrained countries (14). Ecologically, carbon leakage is an issue hindering the potential of internal carbon taxes, such as the EU’s Emission Trading System (ETS). However, it also results in jobs, capitals or technologies being leaked outside of the EU, towards other countries (15).
A carbon border adjustment mechanism would help to avoid carbon leakage and furthermore position the European Union as a leader in low-carbon emissions products. The recent environmental and energy policies of the European Union have created incentives for innovations and productivity in recent years (16). The hope is that a mechanism like the CBAM would change EU trade policy, to make it fueled by research and innovation to decarbonise European products, rather than by the pursuit of never-ending increasing trade flows (15).
It would definitely go further than the current environmental policies on trade that the EU has been building since the Treaty of Lisbon, with for instance the European Parliament’s veto power to Free Trade Agreements. Despite the EP’s involvement, FTAs have not been too constraining towards trade partners. In the trade and sustainable chapters of the new generations of FTAs, clauses linked to the Paris Agreement or on specific issues (such as deforestation in the agreement with Mercosur) are implemented but are far from being constraining.
Countries that are breaking sustainable development rules must indeed face a conciliatory dispute settlement process, which is seen as a long and inefficient process (17). The carbon border adjustment mechanism would therefore help the European Commission’s wish to review and reform its trade policies, an objective depicted in the Green Deal (8). The EU has notably appointed a Trade Enforcement Officer, which role comprises in monitoring the implementation and enforcement of the trade and sustainability chapters within trade agreements.
A carbon border adjustment mechanism would present several advantages, compared with other trade policy options to “green” the Union economy. Politically, the EU citizens have had increasing concerns for questions re- lated to climate policies: the public support should be easy to acquire for the Commission and in correlation, the support of the European Parliament (18). Trade policy has become increasingly politicised in the media and the citizens’ sphere recently, with the debates surrounding the trade agreements with the US (TTIP), Canada (CETA) or the one with Mercosur.
As a result, the EU has increased its transparency on the trade agenda, a measure which seems to be working according to a 2019 Eurobarometer, and a carbon border adjustment mechanism’s proposal should go in this direction (4). There is probably not a better time to implement such a measure than right now, as it is highly popular among EU voters (17). However, as often with the European Commission’s proposals, what matters is predominantly the European Council’s position on the issue.
So far, the proposal seems to have the support in most member states; France, Germany, Poland and Spain have all expressed their positive opinions on the measure, although it will all depend on the final design of the proposal (19). Even if some debates existed among states with exports-dependent industries (20), these could be quickly convinced by the financing such a mechanism would bring. At first, some member states were suggesting the revenue would compensate what has been lost by the United Kingdom leaving the European Union, however the Covid crisis and the borrowing made by the European Commission have more recently made this new source of revenue a very-needed funding for the Next Generation EU recovery plan (21).
This measure would also go a long way towards the European Union’s target of a 55% emissions reduction by 2030 (32). Imports represent around 25% of the emissions of all goods consumed or processed in the EU (19) and as such, a reduction of importations to have production chains in Europe with stricter environmental legislation would help the Union to achieve this ambition. Furthermore, the EU also follows worldwide climate ambitions such as the United Nations Framework Convention on Climate Change (UNFCCC) and as such, member states must decrease their emissions in a quicker timeframe than emerging countries (22). This mechanism would therefore be the per- fect opportunity to transition to an economy fuelled by nascent low carbon industries. It would even be a popular tax among most of the EU manufacturers who have already been paying for carbon emissions since the European Trading Scheme was established in 2005 and face foreign competition.
A carbon border adjustment mechanism might be one of the toughest policies the European Commission has to create in the next decades. Detrimental, as it will deliver very much needed funds to the European Union, it is also a policy that must find equilibrium to be politically feasible and economically efficient. However, the implementation of such a measure would prove to be difficult and costly. A Bruegel study from March 2020 points out to the two paths the Commission could take (24).
Firstly, a comprehensive coverage of the carbon emissions - linked with every product - that would calculate the direct and indirect costs on the entire value chain. However, this approach is a highly costly one; it is not an easy process to calculate the emissions produced at every level of a value chain and could bring a non-tariff barrier to less developed states, who will be discriminated by struggling to comply with the measure. Moreover, some companies could refuse to disclose elements of the chains of productions which are considered trade secret.
The second option would be a carbon border adjustment mechanism that would cover only a selected portion of sectors, which is an approach the Commission prefers, according to the Bruegel’s study. A major portion of industrial emission only comes from a handful of trade actors (In 2018, 55% of EU industrial processes came from 12 sectors). Applying a mechanism to only 12 sectors could be easier and would avoid placing additional administrative burden on the other products which currently account for 98% of EU imports, in terms of values.
This approach also has its limitation: instead of importing, for instance, steel in Europe, companies could decide to import a less-taxed finished product, which would have damaging impact for the European job market and economy; and we have yet to know whether the Commission will tax the final product’s carbon intensity, or the carbon intensity of the overall consumption that was processed during the transport and processing of each of its components (23).
Furthermore, negotiations between which sectors should be taxed won’t be easy for the Commission, between member states and EU trade partners, who might see the sectors chosen as a method to protect some European indus- tries, and it will probably lead to a gradual expansion anyway (16).
While there has been a positive answer from climate experts and economist worldwide for the European Green Deal, the response to the carbon border adjustment mechanism was mixed (24). The most important actors to convince for the Commission are the EU member states themselves, and the trade partners of the EU: if no one follows the EU’s approach, the implementation of a mechanism will be extremely difficult to put in place and could end up being counter-productive.
While most member states have expressed their positive views of the Commission’s idea, for normative or economic reasons, each member state has its own preferences on the question. Some of them are massive exporters of products and fear that there might be retaliation from the EU trade partners if the tax is too high. Others, which might face strong foreign competition in some areas of their industries, could be on the other hand highly interested in a very strict border adjustment mechanism (16). As such, the negotiations within the Council will not be easy in the precise design of this mechanism.
We should not expect all European industries to be advocating for the measure, despite the clear level playing field it would create for them against foreign competition. Indeed, a carbon border adjustment mechanism could harm for instance carbon efficient industries, which could be scared that the products they use for their carbon efficient final products will be tax when entering the EU, therefore raising their prices (16). Likewise, large companies that are already affected by a global trade system that is conflicted and witnessing different tariffs wars, could be disrupted with this new challenge (19). It could however force companies to foster innovation, by finding more environmentally friendly solutions in order to avoid this new cost (11).
This explains in part why some member states will fight internally on the precise design of the mechanism. For instance, the German government and a handful of MEPs have already warned against a rushed and not well-thought implementation, and clearly stated their wish for the adjustment to be manageable for the economy (12).
Internationally, the foreign actors (whether they are allies of the European Union or not) will be tougher to convince, as shown by previous similar actions.
For instance, the response in 2012 to the 2008 EU Aviation directive might indicate potential answers. For this directive that extended the EU Emissions Trading System to the aviation sector (which in result required airline companies to deliver emission allowances based on the amount of carbon dioxide they emitted during their flights within the Union), the EU tried to impose sanctions at international levels, similarly to what the carbon border adjustment mechanism wishes to do. However, the European Union faced a strong opposition to the measure, with 23 countries (including important powers such as Brazil, Japan, Russia, South Korea and the United States) drafting a joint statement to announce that retaliatory actions will be taken if the EU doesn’t withdraw the directive. Some states (China, India, and to a lesser extent the United States) even forbid their carriers to obey to the EU regulations. The EU withdrew its ambition on the topic not long after (24).
The 27 should therefore seek for allies to support the measure before it is implemented. Many have argued in favour of an alliance with like-minded countries. It is a possibility for instance to have several OECD countries setting up a carbon pricing schemes, especially those who already have a Free Trade Agreement with the European Union. Some of their main allies are probably sharing their views on climate change, such as Chile, Canada, Iceland, Japan, Norway, South Korea, Switzerland and even New-Zealand, with which the EU is currently negotiating an ambitious trade agreement, and which coincidentally has one of the most ambitious carbon pricing mechanism in the world (24). Depending on the outcome of the Brexit negotiations, the United Kingdom could also integrate this “carbon club”. As described in the Financial Times, “the CBA offers the distant but tantalising prospect of the EU joining forces with like-minded nations, to create ‘climate clubs’ big enough to prod laggards into faster emissions cuts” (25).
On this issue, the European Commission’s Green Deal states that the EU is “working with global partners to develop international carbon markets as a key tool to create economic incentives or climate action” (8), with a particular attention to its close neighborhood, Africa and the APC countries, which several of them already have free trade agreements with the EU. On this topic, the Union has recently finalised a “post Cotonou” treaty with these countries with a emphasis on sustainable development.
These APC states could see the appeal of a carbon border adjustment mechanism: if a company, for instance, produces steel in a country with very low environmental policies and therefore faced with a high level of tax, it might have an incentive to relocate in the European Union but also to another country with tougher environmental policies (19). A measure like the EU proposal could, for instance, profit states such as Costa Rica and Switzerland (16).
Most experts indeed believe the European Commission will propose a plan from which it will open discussion within the framework of the UN environ- mental program, or the OECD and that if the negotiations do not have the success needed, the EU could just implement an agreement with states that have an equivalent carbon pricing system and step by step, secure agreements with states that implement it (26). Such states include New Zealand or federated entity with international competencies such as Québec and California (26). There is one drawback to such a coalition however: while designing a measure such as the carbon border adjustment mechanism will already be a complicated process within the Council, it will be even tougher with a coalition of like-minded countries. The result might really well end up being a highly watered-down version of the mechanism that was hoped.
On the other hand, two types of countries could oppose the carbon border adjustment mechanism. Firstly, the countries who have opposed the Paris Agreements (although this threat might disappear with the election of Joe Biden) and the industrial powers who export massively to Europe, often with permissive environmental policies, such as India or China, although the latter is expected to launch its own ETS scheme (24). Obviously, opening a dialogue with the two superpowers that are the US and China will be key to the success of the mechanism, as both do not look yet convinced by the measure (21). A trade war is to be avoided with both economies, from which the European markets are strongly intertwined. It will very much depend on the design of the mechanism: if the border tax is only implemented on some industries for instance, and avoid others, this could swing China in (28). On the other hand, how the money garnered is spent will also be key. The United States could for instance dislike the measure, in case the Green Deal means an increase in subsidies towards Europe’s green industries (18). The recent hope brought by Joe Biden’s election, however, could result in a transatlantic Green Deal (and carbon border adjust- ment mechanism), if the American increase their environmental standards (30).
The second group of countries which would fear a carbon tax are the emerging countries, as they see the measure as green protectionism. These states have for instance, with the case of Indonesia, deemed as unfair an EU tax on palm oil trade, which was seen as more protectionist than environmental (24).
These oppositions need, for the European Union, to be hindered: perhaps by not fully applying the carbon border adjustment mechanism to them, or to give lower rates to some groups of countries than the one currently applying on the current domestic EU carbon tax. The reason is that these countries will, without a doubt, be the most affected by a carbon border measure. Firstly, there have mostly export-based economy and such a tax will cause a great blow for their companies (13). Secondly, the administrative costs for this extremely complicated measure will also be opposed by these countries, as calculating embedded carbon is a long and expensive process which favours larger producers and bigger companies (16).
To ease the tensions with emerging countries, in the final plan of the Green Deal the European Union could propose that a part of the revenue brought by the carbon border adjustment mechanism is sent back to help developing nations to calculate the carbon price and to cope with the costs of the measure. Moreover, these states could beneficiate from a longer transition period or different permissions concerning carbon emissions, as it is often the case in international environmental agreement, because the pollution they emit is rather recent compared to other more developed states.
To counter the European CBAM, the trade partners of the EU could confront it through diverse forms of litigation at the World Trade Organisation (WTO). Indeed, despite the need for multilateral actions for this measure to be fully efficient, the pathway to get it agreed at the WTO will not be an easy one.
The article 1 of the General Agreement on Tariffs and Trade (GATT) explicitly says, under the “most favoured nation” principle, that a country is not allowed to discriminate between imported products from different countries and/or producers, if the products are similar.
The likeliness of the products differs under certain criteria, but the carbon emission emitted during their production is not one of them. Moreover, the article II, also called ‘pacta sunt servanda’, declared that existing laws with national tariffs must be respected, and most goods are already under agreements and tariff rates. Negotiations and agreements between WTO members could be needed to increase the tariff rates.
Some tricky pathways exist, notably by levying tax or tariffs that are equivalent to the burden imposed on domestic producers, but it will not be an easy pro- cess. Furthermore, it will be a complicated task to find an acceptable tax rate, but the firms must be informed what additional costs they will face, to plan the necessary technological adjustments and investments to adapt to a potential carbon border adjustment mechanism (11).
Yet there is a possibility - under the article XX of the GATT - to argue, in front of a WTO panel, that a carbon border adjustment mechanism is necessary, even if it violates the aforementioned articles, to protect human and animal life or natural resources. It is a possibility for the European Union, but a delicate one because it needs to prove that it is not a disguised restriction of international trade (26).
“A trade-off between complexity and efficiency”: this is how the European Parliament’s think tank has described the negotiations that will lead to the creation of a carbon border adjustment mechanism (14).
The CBAM has become a milestone ambition of the European Green Deal, and at the same time an important financial resource that will be needed for the European recovery plan: it is at the heart of the European Commission’s mandate, in order to decrease its carbon emission and avoid carbon leakage.
The European opinion on the environment has never been more supportive of such proposals; it is the right time for the Commission to design such a mechanism and to put trade policy at the centre of the European fight against climate change. However, this proposal won’t be a successful one until the European Union manages to meet the expectations of its main trade partners.
While the creation of a “carbon club” - along with its normatively aligned trade partners - seems like an intelligent first step, the negotiations with the more important partners such as China and the United States, even under a Biden administration, will be detrimental to the actual implementation of an efficient CBAM.
Negotiations with developing countries, for which the implementation of a mechanism will be a complicated task but also within the European Member States, will moreover be a potential brake to a vastly ambitious plan, as will a WTO-compliance plan.
This explains why the previous versions of similar proposals have not been a success in the past. The French executive power had notably put the idea on the table on several occasions, starting with the famous “Notre maison brûle...” of Jacques Chirac followed by its “Grenelle de l’Environnement”, established in 2007, where Nicolas Sarkozy, declared to “[be] in favour of environmental protection but [to] want to protect our industry” (30).
At the time, already, the problem of having a coherent policy with trade partners was the main hurdle, as the – then - European Commission President José Manuel Barroso said that it was “premature to discuss this at European level because our aim now is to convince others – the Americans, but also the Chinese – to join us in similar types of measures”.
In 2012, François Hollande had once again asked the Commission to evaluate a similar type of proposal, without success (30). This time, while the proposal has not been initiated by President Emmanuel Macron – although he has shown a strong support to it – member states seem to be supporting the idea, in its most abstract version, as the liberal world is shaken up by Chinese and American policies. “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”, says Eric Maurice from the Robert Schuman Foundation to Euractiv (27).
This CBAM should therefore not be seen solely as an environmental plan, which is really needed due to its normative role, China and the US’ increasing emissions and the European population’s will for a greener economy, but also as a shift for trade policy in the Union, to be finally compliant with the environ- mental ambitions of the 27.
1 – De Gucht, K., 2010. The implications of the Lisbon Treaty for EU Trade policy. S&D seminar on EU Trade Policy.
2 – Woolcock, S., 2010. The Treaty of Lisbon and the European Union as an actor in international trade. ECIPE Working Paper, 1. European Centre for International Political Economy (ECIPE), Brussels.
3 – Dupré, M., 2020. La politique commerciale européenne à l’heure du Green New Deal, Green European Journal
4 – Titievskaia, J., International Trade Policy, EPRS Ideas Paper: Thinking about future EU policy
5 – Meunier, S. and Nicolaïdis, K., 2011. The European Union as a Trade Power. In: Hill, C. and Smith, M. (eds) International Relations and the European Union, 2nd Edition (Oxford: Oxford University Press).
6 – DG Trade of the European Commission, 2015. Trade for All: Towards a more responsible trade and investment policy (Luxembourg: Publications Office of the European Union).
7 – Devuyst, Y., 2014. The European Parliament and International Trade Agreement: Practice after the Lisbon Treaty. In: Govaere et al. (eds), The European Union in the World (Beaverton: Ringgold Inc).
8 – European Commission, 2019. The European Green Deal link please
9 – European Commission, 2013. The impact of EU consumption on deforesta- tion: Comprehensive analysis of the impact of EU consumption on deforestation
10 – Wood, Richard, Karsten Neuhoff, Dan Mora, Moana Simas, Michael Grubb and Konstantin Stadler (2019), “The structure, drivers and policy implications of the European carbon footprint”, Climate Policy (https://doi.org/10.1080/146 93062.2019.1639489).
11 – Krenek, A., 2020, How to implement a WTO-compatible full border carbon adjustment as an important part of the European Green Deal, ÖGfe Brief
12 – Wettengel, J., 2020, US keeps wary eye on EU carbon border tax plans, Clean Energy Wire
13 – Lamy, P., Pons, G. and Leturcq, P., 2019, Greening the European Union’s Trade Policy: the economics of trade and the environment.
14 – Bellora, C. and Fontagné, L., 2020, Briefing: Possible carbon adjustment policies, An overview. European Parliament
15 – Abbas, M., 2020. Decarbonizing Trade Policy. Options towards a European Decarbonized Trade Policy
16 – Zachmann, G. and McWilliams, B., 2020. A European carbon border tax: much pain, little gain. Bruegel
17 – Bedini, G., 2019. EU’s Green Deal must be backed up by tougher trade policy. Mlex Market Insight 18 – Stokes, B., 2020. Europe’s Green Deal Could Open a New Front in the Trade War. Foreign Policy
19 – Aylor, B., Gilbert, M., Lang, N., McAdoo, M., Öberg, J., Pieper, C., Sudmeijer, B., and Voigt, N., 2020. How an EU Carbon Border Tax Could Jolt World Trade, Boston Consulting Group.
20 – Tamma, P., 2019, Wanted: Perfect design for Europe’s carbon border tax, Politico
21 – Moscovenko, L.R., 2020, EU’s carbon border tax proposal still has many grey areas. Euractiv
22 – Egenhofer, C., Elkerbout, M., Can Europe offer a Green Deal to the world?. Center for European Policy Studies
23 - Lamy, P., Pons, G. and Leturcq, P., 2020. Greening EU Trade 3: A Border Carbon Adjustment proposal. Institut Jacques Delors
24 – Horn, H. and Sapir, A., 2020. Political Assessment of Possible Reactions of EU Main Trading Partners to EU Border Carbon Measures. Bruegel
25 – Lowe, S., 2019. EU risks trade fight over carbon border tax plan. Financial Times
26 – Pons, G., Borchers-Gasnier M.A., Leturcq, P., 2020. Greener After: A Green Recovery for a Post- COVID-19 World. SAIS Review of International Affairs, 40(1)
27 – Stam, C. and Moscovenko, L.R., 2020. EU carbon border tax: How a French idea ended up in the limelight. Euractiv
28 – Early, C., 2020. The EU can expect heavy pushback on its carbon border tax. China Dialogue 29 – Politico, 2020. Leading by example on the European Green Deal
30 – Euractiv, 2009. Sarkozy renews pressure for CO2 border tax
31 – Euractiv, 2020. EU and ACP finalise post-Cotonou treaty, after two-year delay
32 – France 24, 2020. L’UE se fixe de nouveaux objectifs de réduction d’émissions de gaz à effet de serre