We continue with part II of our series Carbon border tax explained. See part I, if you have missed it.
There are several motivations for the European Union to consider introducing a Border Carbon Adjustment (BCA) regime:
Avoid carbon leakage
Carbon leakage means that the positive CO2 reduction effect that a tightening of the EU’s environmental legislation would have within the EU is offset by the additional CO2 emitted outside the EU, possibly leading to an overall increase in emissions. This can occur because existing economic activity may relocate to countries with lower regulations and production standards either through plant relocation or increased shares of imports from those third countries. Other possible leackage effects occur if new investment is diverted to more poorly regulated countries or price increases in the EU reduce domestic demand for a certain product, lowering global prices, which can lead to increasing demand elsewhere. A BCA could prevent such unwanted carbon leakages which weaken the effectiveness of the EU policy.
Maintain the competitiveness of the EU’s industry
A BCA will ensure that the price of imported goods reflects the costs for emitting greenhouse gases that would have incurred had the product been produced domestically. Domestic markets are thus protected against markets with a less stringent environmental jurisdiction. This is also seen as an important argument to silence criticism within the EU that the European Green Deal would put an unreasonable burden on EU companies and workers. While the competitiveness argument is an important selling point to build support in the EU for the New Green Deal, it is not a legally valid argument to justify the BCA’s compatibility with international trade law.
Incentivise other economies to become less carbon intense
Given the size of the EU’s market, a BCA provides an incentive for other economies wanting to sell to the EU to decarbonize their production processes. It might also be a leverage in international climate negotiations as other economies could feel more compelled to agreeing on a global carbon price or adopting more stringent policies to reduce greenhouse gases. However, some authors consider this assumption as debatable. Firstly, because the effect will be small in most exporting sectors in most countries to really influence policy-making in these countries. Secondly, because a unilateral action of the EU would create a lot of controversy internationally and possibly lead to trade disputes and retaliation measures. It also raises the question about whether an EU-only BCA was in compliance with the UNFCCC principle of common but differentiated responsibility and respective capabilities for climate change mitigation, which recognizes that developing countries should not be expected to implement the same kinds of policies and bear the same costs as developed countries.
Raise additional revenues
Even though this argument is and should not be the decisive motivation for introducing a BCA, a positive side-effect of introducing a carbon border tax is that it would generate additional revenues for the EU in the form of a tax collected at the EU’s borders. These revenues could be used to cushion the EU’s energy transition costs or support developing countries in their CO2 mitigation efforts.
Continued in Part III.