EU govts agreed a covid recovery deal this week inc plans "with a view to" starting a carbon border tax from 2023.

Details are thin & nothing yet final, but European Commission is consulting on the idea.

What does it say & why am I sceptical?

THREAD

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-Carbon-Border-Adjustment-Mechanism

Just for background, here is my thread on the EU deal https://twitter.com/DrSimEvans/status/1285933174342717441

Also notable is that the draft US Democratic climate platform mentions carbon border adjustments.

An idea whose time has come? https://twitter.com/LeoHickman/status/1286050520008929280

Well, the idea of a carbon border adjustment to complement domestic CO2 pricing has a long history

In this 2010 paper, for example, researchers look at how it could be used to shield EU heavy industry from unfair competition from higher-carbon imports

https://www.sciencedirect.com/science/article/abs/pii/S0301421509008982

The idea of a border adjustment stems from sound economic theory and, some economists have long argued, game theory suggests it could generate political pressure to expand and raise climate ambition globally

See this 2012 paper making the case:

https://www.cccep.ac.uk/wp-content/uploads/2015/10/Trade-climate-change-game-theory-border-carbon-adjustments.pdf

There are three problems:

1) compliance with WTO rules
2) politics at home and abroad
3) technical implementation challenge

The EC consultation says it will design the measure to comply with (1).

But let's take a closer look at (1)-(3) in turn.

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-Carbon-Border-Adjustment-Mechanism

1) WTO

The consultation offers 4 options for a carbon border adjustment mechanism

A) Tax on certain imports
B) Importers must buy EUETS carbon credits
C) Importers must buy credits from a special pool
D) EU-wide tax on certain goods (imported or not)

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-Carbon-Border-Adjustment-Mechanism

According to Reuters, option A runs the risk of breaching WTO rules…

…option D would be safer for WTO rules but confers tax-raising powers on the EU.

That would be controversial.

Options B/C require major EUETS reform.

https://www.reuters.com/article/us-climate-change-eu-carbontax-explainer/explainer-what-an-eu-carbon-border-tax-might-look-like-and-who-would-be-hit-idUSKBN1YE1C4

2) Politics

Next big problem for an EU carbon border tax is domestic politics.

If you use it to address carbon leakage, then you have to scrap existing anti-leakage schemes.

This is made explicit in the EC consultation:

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-Carbon-Border-Adjustment-Mechanism

Current anti-leakage measures include billions of euros-worth of free allowances for industry.

You think they want to give those up?

https://www.carbonbrief.org/qa-will-reformed-eu-emissions-trading-system-raise-carbon-prices

2) Politics

Although the game theory argument suggests a border tax confers global climate policy advantages, there are also bound to be political problems internationally, beyond the technical question of WTO compliance.

…and we're basically in a global trade war already

If idea is to get other countries to raise climate ambition / impose own carbon price, you'd want to exempt them from the border adjustment as reward…

…but that might reopen WTO trouble

("most favour nation" etc)

https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm

3) The final problem for a carbon border tax is technical

What products covered?
What is embodied GHG of prod X from country Y?
Is prod Z from region F different?
What about Scope 1/2/3 emissions?

The EC consultation asks how to navigate these:

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-Carbon-Border-Adjustment-Mechanism

The European Commission is obviously serious about trying to make a carbon border adjustment workable, and EU member states have backed that process.

But there is a long road ahead and we are a long way from seeing it implemented in reality.

ENDS/