One of the key tenets of the EU’s Green Deal — to introduce a “carbon border adjustment mechanism” that would charge import taxes on carbon-rich products made outside the bloc — carries a “big risk” of international trade wars, according to the head of renewables at the International Energy Agency (IEA).
Paolo Frankl told Recharge in an exclusive interview that the IEA had discussed the matter internally last week while discussing the new China-led free-trade coalition in the Asia-Pacific region.
“We feel if in the West, there was a push to establish this border mechanism without a proper, incredible effort in negotiations, there would be a big pushback from Asia,” he said. “And then you enter into a new territory in which the cost [of the mechanism] would be high.”
He pointed out that the issue would not just be higher costs for companies exporting to the EU, but that there might be a “perception of a big injustice” from those outside Europe
Frankl explained that the Yellow Vest protest movement in France, which was triggered in 2018 by carbon taxes on fuel, was not only about higher prices for consumers, but also a keenly felt sense of injustice against lower-income individuals and families.
“I fear [that there would be] the same narrative in a carbon tax at the border. The poor who profit from trade will be hit by that,” said the Italian.
“I’m not saying [carbon border taxes] are a wrong idea per se. But my general point is that the transition needs to be just, otherwise it will be perceived in the wrong way. And sometimes we — all of us sitting in the rich West in a comfortable house, we definitely do not have the same perspective as someone in emerging economies and in developing countries.”
The carbon border adjustment mechanism is designed to prevent so-called “carbon leakage” — the notion that companies facing higher costs due to carbon pricing or other climate-related demands would move business overseas where they would not face such costs. For instance, it is not a good idea, politically or economically, to make gas-fired EU steel more expensive to produce, and then allow EU companies to buy cheaper coal-fired steel from China instead.
European Commission president Ursula von der Leyen said in September that the mechanism “should motivate foreign producers and EU importers to reduce their carbon emissions, while ensuring that we level the playing field in a WTO-compatible [World Trade Organization] way”.
So what would be the alternative to carbon border taxes?
“I don’t have the perfect answer — if I did I would be very rich and very famous,” said Frankl. “For me, the alternative is to have negotiations at all times [with non-EU nations] and a kind of climate diplomacy in which everybody does their own bit. Which is, in the end, the spirit of the [international COP] climate conventions.
“For me, COP26 next year is a very, very important milestone where the principles of the Paris Agreement need to be taken to the next level of policy implementation.”
The carbon border adjustment mechanism was part of the EU Green Deal, which was announced last December, but has not yet been approved by member states.
When the concept was discussed at the European Parliament in October last year, the contentiousness of the idea seemed to be recognised. Frans Timmermans, the EU's Climate Commissioner, told the parliament's members: “My idea would be to say to our international partners: we are making this transition to a climate-neutral economy by 2050. If you make the same measures or comparable measures going in the same direction, we will make this voyage together.”
In addition to potential trade wars, the tax also faces two other potential problems: that it will be extremely hard to calculate the so-called “carbon content” of products made overseas; and that it would lead to increased prices for imported products, which would be unpopular among voters and potentially drive up inflation.