Principles and best practices in border carbon adjustment: a modest proposal

The carbon border adjustment (BCA) is coming; it is no longer just a controversial hypothesis. As described in our recent report, the European Commission has proposed to implement a BCA mechanism by 2023, Canada has launched formal consultations on the shape of its own regime, and the US and UK both have pledged to follow suit.

Other countries are likely to follow as climate ambition becomes more meaningful. Sixty-three parties to the United Nations Framework Convention on Climate Change, representing 54% of global GDP, have communicated a target of net zero to the Secretariat. Seven have enshrined this objective in law. Canada has a legislated carbon price that will rise to 140 USD / tonne by 2030. The European Green Agreement is credible enough that by early September 2021, the price of European Union emission allowances will set. new records at over 60 EUR / tonne, almost double their price. since seven months earlier.

The carbon border adjustment (BCA) is coming; it is no longer just a controversial hypothesis.

There is a direct link between this heightened ambition and BCA. Addressing climate change almost certainly means imposing substantial carbon costs on energy-intensive sectors exposed to trade such as steel, cement, aluminum and chemicals. However, no country is willing to do this at the national level if it simply means shifting greenhouse gas (GHG) emissions to competing sectors in other countries.

Thus, the inevitable partner of climate ambition is a kind of protection against leaks, that is to say the increase in emissions abroad in response to strong national climate policies. And while BCA can be flawed, complex, legally questionable, and politically explosive, it is also the primary among the options for this type of protection.

BCA works by charging goods at the border a carbon price equivalent to what they would have paid had they been produced under the national carbon pricing regime. But this basic function can manifest itself under very different regimes, depending on the choice of design elements. The scheme proposed by the European Commission is radically different from the most recent BCA proposal in the United States, the FAIR Act (presented by Senators Chris Coons and Gary Peters to the 117th United States Congress on July 19, 2021). Part of this is because of very different underlying weather regimes, but also because of different choices on features, including credit for foreign climate action.

The inevitable partner of climate ambition is a kind of leak protection.

The variety of possibilities means that any BCA regime will fall on a spectrum that ranges from purely environmental to highly protectionist in nature. As such, some argued that there would be a tangible benefit to an international agreement on principles and best practices in the development and implementation of ACAs. Such an agreement could act as a bulwark against domestic protectionist pressures during the policy-making process, just as multilateral trade rules currently do.

Some would say that such an agreement amounts to legitimizing a tool that they would prefer never to see put into practice. But the point is, it will likely be put into practice, and if it does, there is value in guiding it to make it as good as it can be.

Others may prefer a reactive strategy, subjecting any BCA to World Trade Organization (WTO) dispute settlement. But this course has its drawbacks. This would set up the dispute settlement mechanism for a very confrontational outcome; it would test a currently failing system without a functioning Appellate Body; it would probably take years to resolve; and in the uncertain eventuality of the victory of the plaintiff (s), the defendant would be strongly motivated to seek ways to avoid modifying the offending measures, given the urgency of the climate objectives.

Any BCA regime will fall within a spectrum that ranges from purely environmental to highly protectionist nature.

The following is a list of proposed principles and best practices for the development and implementation of ACAs. These are just proposals, designed to illustrate concretely the kind of agreement that could be reached through international discussions.

Principles

  • Primacy of leakage protection: ACB should seek to prevent leaks – an environmental goal that involves enabling national climate ambition. It should not be aimed at preserving or increasing the competitiveness of domestic enterprises, as we have multilateral agreements to refrain from using trade measures for this purpose. The argument here is that while preserved competitiveness can be a result, it should not be an objective). CBA should also not be used to force other countries to adopt more ambitious climate policies; judging the adequacy of the climate ambition of other countries is not the prerogative of any country.
  • Income sharing: A significant portion of a BCA’s income should be returned to exporting companies or countries, for example, by reducing producer costs to comply with the BCA regime.
  • No double protection: BCA charges on foreign products should be adjusted downward to take into account all national measures that protect the sectors covered from a full carbon price. Only the effective the price of carbon should be levied on imports. Failure to do so implies unfair double protection for domestic producers.
  • Credit for equivalence: BCA should grant credits for the actual carbon prices already borne by foreign goods in the exporting country, as such carbon pricing reduces the risk of leakage. It should not give credit for non-price foreign policies, assuming that the border “adjustment” is aimed at compensating for domestic price-based policies; the two types of policies are not equivalent.
  • Opening: There should be meaningful and timely consultation on regulatory proposals with relevant trading partners, and full transparency in the implementation and operation of the regime.

Best practices in development and implementation

  • Blanket: CBA should only cover goods subject to national carbon pricing.
  • Questionable assumptions: If a defect is used to determine the GHG intensity of foreign goods, foreign producers should be able to challenge that defect by submitting actual data.
  • Downstream sectors: BCA coverage should only be extended to downstream sectors if they are faced with a risk of leakage equivalent to the thresholds used to qualify upstream sectors for coverage.
  • Derogations: There should be no national exemptions from BCA coverage on the basis of national policies (eg based on the level of ambition of climate policies). As stated above, no country has the prerogative to unilaterally judge the adequacy of the climate ambition of other countries.
  • International standards for data: Data on GHG intensity should be required according to an internationally recognized accounting regime, such as the GHG Protocol or ISO 14064. Ideally, all countries with ABCs that require such data would accept the use of ‘a single reporting standard.
  • Recourse mechanisms: There should be independent mechanisms to appeal any decision or judgment made under the BCA regime with respect to foreign producers or commodities.

The ideal forum for discussing principles and best practices would be a multilateral forum that would include both the voices of those proposing CBA and those potentially affected by it. The WTO would seem to fit this bill.

The ideal forum for discussing principles and best practices would be a multilateral forum.

But let’s be clear: what is being proposed here is not a negotiated and binding consensus agreement between WTO members. Such an ambition is neither realistic nor useful. A more appropriate discussion could be a discussion in an informal working group or, if necessary, in a forum parallel to the formal WTO processes. The former has been put to good use in the past when given a concrete timeline and an agreed set of deliverables.

But such a process should be accelerated. It is probably already too late to inform the EU policymaking process, and the rush for greater climate ambition in other countries is intensified by the growing evidence of climate impacts and the resulting pressure on policy makers to take action.

MC12 is a crucial time for WTO members to begin meaningful engagement on ACA.

A starting point could at least be to raise the issue as a shared concern at the next WTO Ministerial Conference in November 2021 (MC12). This could appear, for example, in the statement currently being drafted for the conference by a group of WTO members who have come together in structured discussions on trade and environmental sustainability. This group convened discussions on the BCA at its first meeting in March 2021 and may refer to those talks as a way to put the issue on the table and recommend further work within the WTO proper.

The pace of developments in this political space is such that MC12 is a crucial time for WTO members to begin meaningful engagement on the BCA – a policy tool that will have fundamental implications for the multilateral trading system.

Disclaimer

IISD – International Institute for Sustainable Development published this content on November 24, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on November 26, 2021 06:49:07 PM UTC.

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