EU: New Commission’s Carbon Tax Plan

Published on November 27, 2019

The new European Commission headed by Ursula von der Leyden received the official endorsement of the European Parliament at its plenary session in Strasbourg today, and will now be ready to formally take its post on December 1.

With the primary goal of fighting climate change worldwide, von der Leyden will aim during her 5-year tenure as EC President to set the European Union on a path towards climate neutrality by 2050. Achieving that ambitious goal will entail pan-European plans that will have a profound impact on individual sectors within the EU economy, as well as a new, and controversial, Carbon Tax aimed at foreign counterparts.

*** Von der Leyden’s plan within the EU is to extend the Emissions Trading Scheme to the maritime, traffic, and construction sectors, and to cut the number of free allowances currently granted to airlines. This will be accompanied by tax incentives to encourage green energy, with a “New Industrial Strategy” and a “New Economy Circular Action Plan” to boost recycling, re-usability, clean technologies, and the de-carbonization of energy-intensive industries. ***

*** To make sure the EU does not face a rebellion from miners, steel, and coal workers, von der Leyden will also propose a “Just Transition Fund” to help transition employees from smokestack to green industries. Presumably, that would also be aimed at winning over EU member states now in opposition to the 2050 climate goal, including Poland, the Czech Republic, and Estonia. ***

*** But a potentially more explosive measure to look for will be a “Carbon Border Tax” plan that could have a major impact on EU trade with both China and the United States. If instituted as currently suggested, the plan is highly likely to cause friction with both countries, especially if facing a second Trump term as president. ***

Von der Leyden will, from what we understand, look to publish this “European Green Deal” proposal as early as in the first half of December.

The “Carbon Border Tax”

Under von der Leyden’s “Carbon Border Tax” Plan, the EU would levy a fee/tax, or set higher trade tariffs, on the carbon content of materials and goods imported from countries that do not meet the EU’s carbon emissions standards.

The stated rationale will be to protect EU businesses from lower-cost and less climate friendly competitors from abroad, given that the EU companies would themselves be facing higher climate-related standards themselves under the new regime.

Assuming China and the United States will not be sharing the EU’s very ambitious climate-neutrality standards anytime soon, the plan is likely to translate into levies on a significant swathe of imports from these two trading partners.

The Implementation Challenge

The major challenge von der Leyden will face is that taxes at the EU level can only be approved through unanimous agreement of all 27 member states – not an easy process in the best of circumstances.

The plan itself – essentially a protectionist measure to help advance climate change goals – should as such be popular within the EU. But given the Commission’s leading role in trade matters, it might be easier for von der Leyden to introduce such a levy first in the form of higher tariffs on imported goods.

With that in mind, von der Leyden has indicated that any tariffs imposed under the Carbon Border Tax would have to be fully compliant with WTO rules, and is promising to start with select sectors only, before widening the principle more broadly to other areas.

Specifically, the WTO’s “National Treatment Principle” prohibits discrimination of imports over domestic products (for what that’s worth). But that discrimination standard could be averted by the EU if the Carbon Border Tax was to be introduced as a climate protection measure instituted concurrently with the new standards being laid out for EU-made products.

The EU would still need to show the WTO that the border fee is in line with its Emissions Trading Scheme (set to be extended to other sectors). But the EU has experience with this, having successfully made a similar case with biofuels in setting sustainability criteria for imported biofuels that are equivalent to EU standards.

There is also a complex technical problem in determining the exact carbon content of imported goods, especially when including the whole production chain – for example in determining whether the energy used for production came from a sustainable source, in measuring the energy efficiency of the production process, and so on. In light of those challenges, von der Leyden’s plan to start with a select group of sectors may make a lot of sense.

The Carbon Border Tax will not happen overnight. It will be a long and arduous process before it is agreed among EU governments and institutions. But long time EU-watchers believe it will happen, even if it takes a year or more to get there.

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