Imported products will face the same cost for greenhouse gas-emissions as products produced within the EU. That is the basic idea of a proposal that the European Commission is considering. The National Board of Trade has analysed how the EU could implement such a system and what it would mean for trade and for emission reductions.
What is your conclusion?
Our report shows that it is fully possible to design a Border Carbon Adjustment (BCA) that is in compliance with WTO rules. But such a measure is very complex and it needs to be very carefully designed to be efficient and in compliance with WTO law. Two of the most difficult issues to solve is how to take other countries’ climate policies into account and if export rebates for EU companies may or should be included
Why does the Commission want to introduce BCA?
The purpose is to reduce the risk of carbon leakage, which is a situation where emissions in other parts of the world are increasing as a result of a more ambitious climate policy in another country. This can happen, for example, if a European company is relocating its production to a country where it is cheaper to emit greenhouse gas. If the EU introduces tough climate requirements and it leads to carbon leakage, the efforts made by the EU could be offset, and in a worst case scenario, the global emissions could increase instead of decrease.
This is what the Commission hopes to avoid in implementing a BCA. In the EU today, carbon leakage is handled by handing out free emission allowances to some industries. This system is heavily criticised for not being efficient, thus the Commission wants to replace it with a BCA.
How would it work in practice?
A BCA would mean that the emissions caused by imported products would cost as much as emissions caused by products produced within the EU. In practice, it would most likely mean that importers of the selected goods have to pay a fee or buy emission allowances that corresponds to the emissions the imported goods have caused in production. If the imported goods’ emissions already have been subject to a carbon price in the country of production, there should be a possibility for deductions corresponding to this.
A prerequisite for the system to be implemented is that it is compliant with WTO rules, how would that work?
The EU will have to follow the criteria set up in one of the exception clauses in the WTO rules (Article XX(g) in GATT) and the requirements that follow from that provision, which allows exemptions from the so called substantive rules of the GATT for measures aimed at protecting the environment. It is vital that the entire design of the system is focused on reducing emissions, and not to protect European companies. Our analysis also shows that the use of the revenue could affect the compliance. Furthermore, the system must take other countries’ climate policies into account to not discriminate arbitrarily or unjustifiably.
How would BCA affect EU trade?
It is a difficult question to answer as it depends on what happens to the free allocation, and whether or not an export rebate is introduced. Also, the introduction of a BCA could affect trading conditions if other countries interpret BCA as a protectionist measure and this leads to conflicts. This risk can, however, be counteracted by having an open and transparent process.
What is the advantage of the system?
The main advantage of a BCA is that the EU and Sweden can introduce more efficient carbon pricing without causing carbon leakage. The system can also put pressure on both EU and non-EU companies to reduce their carbon emissions. Another advantage is that the introduction of a BCA leads to an increase in the price of emission-heavy products, which in turn reduces the consumption of these products.