Think Tank Analyst Predicts EU Carbon Border Tax Won't Pass Until 2023
The European Parliament has a goal of reaching an agreement with the European Council on how to structure a carbon border adjustment measure by the end of this year, but Domien Vangenechten, from the Brussels location of the E3G think tank, believes that's a "very optimistic deadline.... I'm very skeptical of that happening." He said it could take until mid-2023 or late 2023.
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Even when the CBAM passes, exporters won't immediately face tariffs if they're exporting from countries that do not have an equivalent price on carbon to the EU, Vangenechten said during an April 26 webinar hosted by the Niskanen Center, a centrist think tank that promotes addressing climate change through market solutions and less red tape for environmental projects. That's because there is a two-year period where the EU will track what importers would have paid on goods in the targeted sectors, but no cash changes hands (see 2110290028).
The EC's proposal covers aluminum, steel and iron and cement and electricity, and the U.S. exports very little of those to the EU -- according to a former top EU trade official, it would touch just $1 billion annually of exports, out of $260 billion (see 2203170060).
Panelist Catrina Rorke, executive director of the Center for Climate and Trade think tank, said that as it's written, it would "not substantially affect bilateral trade between" the EU and the U.S. But she noted that the Parliament has proposed adding some chemicals and polymers to the CBAM regime, and that would affect more U.S. exports.
Vangenechten said that while there is pressure to expand the sectors list, he doesn't think polymers and plastics will be in the initial phase.
Vangenechten noted that some difficult political questions in the EU have not been tackled, such as how to phase out free allowances to the EU's carbon price for carbon-intensive industries such as steel. Originally, they were going to be phased out by 2036; another proposal has been to speed that up to 2028. He said he doesn't support the 2028 date, but thinks they'll arrive at a date somewhere in the middle. Even now, the rules around free allowances could use a tune-up, he said. Businesses are offered credits based on the carbon footprint of the cleanest 10% of producers in their fields. But he said those assessments have issues.
He said there's also a big question mark about whether the EU will try to offer export rebates to its carbon price to maintain export competitiveness. This is not compliant with World Trade Organization rules.
Economist Aaron Cosbey, who works for the International Institute for Sustainable Development, said Canada's carbon border adjustment tax is a few years behind the European legislation. He said Canada's carbon price is slated to rise from about $40 a ton to $130 a ton by 2030, and as it gets more expensive, it will be difficult for Canadian producers to compete with countries like the U.S. that do not have a national price on carbon.
But imposing a CBAM in Canada is really difficult because 70% of its trade is with the U.S., and there are sectors like electricity and autos where the two countries are deeply integrated. The European CBAM covers electricity imports. He said Canada does not want to provoke the U.S. with a unilateral approach, especially since, he said, the U.S. has a history of taking actions that don't comport with trade remedy laws "when it feels aggrieved."
Cosbey said that some of the sectors in the EU that are expected to be protected from carbon leakage with a CBAM export more than 20% of their output. Because of this, he said, many say that a CBAM without export rebates would be "politically and economically untenable."
But he said it's difficult to find a way to do that within WTO rules. He said he thinks the EU should "put in place the most WTO-compliant mechanism you can."