May 15, 2019

Carbon "tariffs" could trigger a collision of climate and trade policy

Illustration: Sarah Grillo

In a recent speech, French President Emmanuel Macron raised a proposal for an EU–wide carbon “tariff” on goods coming into the bloc from countries without a price on carbon — a way to lead by example on climate while still leading through advantage for industry.

Why it matters: The plan could prompt other countries to adopt carbon pricing in part to avoid disadvantaging their goods and services. In the best case, it could lead to a rapid increase in the amount of global emissions exposed to a carbon price, without creating excessively harmful economic distortions.

The catch: Border adjustments are delicate mechanisms and will have to be designed with the game theory of other countries' likely responses in mind. In the worst case, such a charge might be contested before the World Trade Organization.

  • Even if the WTO validated the policy, a supportive ruling disregarded by key economies such as the U.S. would damage the organization's credibility in exchange for no meaningful climate action.

Where it stands: The system Macron discussed would be incredibly complex and could take years to develop. But one thing is sure: Efforts by various countries to advance a "green" industrial policy, in all its forms, are only set to expand.

  • France's idea has been unsuccessfully floated before, but it's noteworthy that Europe’s largest business lobby recently dropped its opposition.
  • ArcelorMittal, the steel and mining company, is also calling for a "green border adjustment" that would protect it from imports of steel not currently subject to EU carbon fees.
  • The U.S. could expose itself to trade sanctions for its failure to ratify the Kigali Amendment to the Montreal Protocol, an environmental agreement supported by American industry and many Republicans.

What to watch: Although climate change is polling as an increasingly important issue for both Democratic and Republican voters ahead of next year's U.S. presidential elections, candidates have said relatively little about the intersections of climate and trade policy.

  • A recent proposal by John Hickenlooper to integrate climate goals into U.S. trade agreements may yet mark the beginning of a shift for the 2020 race.

David Livingston is deputy director for climate and advanced energy at the Atlantic Council Global Energy Center.

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