Summary:
The design and implementation of a border carbon adjustment (BCA) or alternative policy should be guided by policy objectives in light of the potential trade-offs. We believe that strengthening of climate actions by reducing carbon leakage is the main goal since the European Green Deal aims to achieve the climate targets of the Paris Agreement. We also see other important objectives, including the avoidance of social and economic harms, the limitation of legal and political risks, the minimization of the administrative complexity and costs of avoiding carbon leakage. Various trade-offs and challenges exist for the design options of a BCA or its alternative. A BCA could target imports only, or both exports and imports. It could be added to existing or future free allocation or become a stand-alone anti-leakage measure for sectors at risk. Export rebates or (even more so) a combination of free allowances with export rebates could raise red flags, given that they do not serve climate protection and could qualify as prohibited subsidies under WTO rules. If there is no global carbon price, there is no uniform incentive to reduce emissions for both domestic consumption and production. An export rebate would necessitate a decision to create a level playing field for all European exporters on the international market or support low-carbon European exports only. Import adjustments, on the contrary, could potentially be designed WTO compatible. If a BCA is to be implemented, the issue of how to calculate the carbon intensity of goods entering or leaving the EU needs to be addressed. This could be resolved by choosing default values for a sectorial average. Default values avoid trade discrimination but would not be fully accurate. A leakage risk remains. Full calculations can avoid leakage but are administratively very difficult. Default values would help in operating a BCA, if a BCA is applied to only a few sectors, given that data on production technologies across the EU exist. Third-party certification could be used by producers abroad that perform better than the EU average. A clear trade-off exists regarding the scope of a BCA. If it is broad, it avoids competitiveness impacts on downstream producers and material substitution effects. However, a broad scope results in high administrative burden and methodological clarity.
The different treatment of products with a carbon-intensity higher than the EU’s average could be at odds with the WTO law and the national treatment principle. It will depend on the details of the BCA design. The trade-off is between environmental effectiveness, which can be achieved by stringent and ambitious forms of discrimination under a BCA, and WTO legality, which is more easily achieved by less effective formulations.
The exemptions from a BCA for countries based on their climate policy actions would need agreement on criteria. Country-based exemptions are difficult to reconcile with the WTO principle of Most-Favored Nation. Country-specific settings of the BCA would require scrutiny. Granting credits if there is carbon pricing in the country of export, however, is a key element of a BCA design. Such credits for non-price–based policies pose challenges in how to calculate them. An alternative to border measures exists. By combining an emissions trading system with a consumption charge on carbon intensive materials, the ETS would continue to provide incentives for climate-friendly production of materials. The combination of free allocation of allowances with a consumption charge levied on carbon-intensive materials sold in the EU allows for a carbon price signal along the value chain and addresses leakage, while avoiding the complexities of trade-related measures.
Keywords: Border Carbon Adjustments, International Trade, Industrial Decarbonization, EU ETS, Low Carbon Materials
Registration date: 22/06/2020
IIT-20-062A
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