Steve Valk Interviews Shuting Pomerleau About CBAMs

To dig a bit deeper into the topic of carbon border adjustment mechanisms (CBAMs), CCL’s Steve Valk talked to Shuting Pomerleau, a climate policy analyst at the Niskanen Center who specializes in carbon taxes. The following is an edited version of their full conversation.

Steve: Russia recently announced it was considering a carbon tax in response to the EU carbon border adjustment mechanism. Can you envision other nations doing this? Which nations have a high volume of trade with Europe and might respond to Europe's CBAM by implementing a carbon tax?

Shuting: I definitely think that other nations, if not right now, maybe in the near term or long term, will follow suit and similarly consider a carbon tax or other climate policies in response to the carbon border adjustment. Now what nations, I haven't really looked at the trade data in detail, but China and India are probably on top of the list of high volume of trade with Europe in carbon-intensive goods. I think if a carbon border adjustment is designed well, it's a really powerful and useful mechanism to incentivize foreign producers to decarbonize. 

Steve: Developing countries, historically, have not contributed to the accumulation of CO2 in the atmosphere that the developed countries have. Do you think these countries will be given a discount or a pass on carbon border adjustments? If so, what kind of leverage would there be for them to do better?

Shuting: I think the EU officials recognize the need to give differential treatment for developed and developing countries due to the reason that you just mentioned. Maybe exempting the least developed countries or giving them some kind of credit. From a policy design perspective, I'm not entirely sure how practical it would be. Such a design element may have unintended consequences. If you were to partially or fully exempt a certain number of countries from a border adjustment, there's a huge risk for circumvention through trans-shipping. Other countries that are covered in the border adjustment would want to ship their goods through those exempted countries. I think we should apply the border adjustment equally on all trading partners, including developing countries, and then provide more assistance and funding for developing countries.

Steve: Despite the pushback from a number of countries, the EU appears to be standing firm on the imposition of a carbon border adjustment. Do you think the WTO will back the EU on this policy?

Shuting: I think that [the EU] recognizes the importance of making their policy as compliant to the WTO rules as possible. They are planning to put in place a reporting system by 2023. Not starting implementation, just collecting data. They won't do anything to collect the import tax until 2026. I think they're working closely with the WTO to make the provisions and implementation compliant. They want to make sure exporters selling to the EU don’t double pay. If they’ve already paid for a carbon price in their home country, then they will get that amount of deduction or credit, but only for an explicit price, not regulations, tax credits, subsidies or standards.

Steve: So, if Europe has a $60-a-ton price and the country that's exporting to Europe has a $20-a-ton price, would that mean that the exporters have to pay $40 per ton?

Shuting: That's one multiplier: the tax rate. The difference here is $40, according to the provisions right now, they will get 20 bucks credit per ton of emissions associated with the imported goods. That’s the way they’re trying to do it, but that’s very administratively complicated. You need to really nail down, on a product level for each single product imported into the EU, what is the credit on that product and determine whether it’s an implicit or explicit carbon pricing policy in the home country and how much to rebate. Giving credits to trading partners and treating them differently may violate the WTO rules.

Steve: Let's make this a little more complicated. There are some nations, like the U.S., that are hoping to be exempt from the EU CBAM because of policies other than carbon pricing — regulations, incentives, forest preservation. How likely are countries to get a pass on the carbon border adjustment without carbon pricing?

Shuting: They made it really explicit that they would only give a credit to countries with explicit carbon pricing and we all know that includes cap and trade like ETS [Emissions Trading Scheme] or a carbon tax. There are a lot of reasons why they probably don't want to give a pass on non-pricing policies. One is that it’s just an administrative nightmare. From the policy design perspective, I don't think you should give any credits to your trading partners. Just apply equally to all trading partners. I don't see much need for giving a pass if there are regulations. Also a border adjustment is different from tariffs. A well designed border adjustment’s effect on the economy and trade is different from tariffs. Principally the effects of the import tax and export rebate in border adjustments would cancel each other out due to exchange rate adjustments. So it would be different from tariffs. I would be surprised if they will give a pass to countries that have regulations.

Steve: It looks like a border carbon adjustment is not going to make it into the reconciliation bill. Sen. Whitehouse, who is leading the carbon pricing effort, thinks this could be handled through executive action. Is that a feasible approach? 

Shuting: There's been a widespread misconception that border adjustment equals tariffs, and I think that's why there has been some proposal saying that maybe we could just enact the carbon border adjustment through executive action like how Trump enacted the tariffs on China. I think what those proposals are actually proposing is an import tariff, not a border adjustment. It's only an import tax. There's no export rebate, so you're not adjusting anything. You're just putting a tariff on imports. I think the President can enact carbon tariffs if he really wants to, but I don't think that's meaningful or good policy. We already have so many tariffs in place. We have trade wars. A lot of domestic manufacturers in the U.S. are calling for lifting the tariffs. 

Steve: So, the EU already has something in the works. Canada's planning to implement a CBAM, and the UK is considering it. If the U.S. joins this club with a carbon price and border adjustment, that would have a pretty major impact on global trade. Do you think this could finally push the world to the kinds of commitments that would be in line with keeping global warming below the 1.5 C threshold?

Shuting: Definitely. I think the implications of that would be really significant. If the EU, Canada, UK and the U.S. all have some sort of domestic carbon pricing and border adjustment policies, the border adjustment is really addressing emissions in trade that flows through these countries' borders, and that will actually have quite significant implications. We live in such an integrated world right now. Trade everywhere with all these big jurisdictions, big parts of the global economy. If they're moving in that direction, I think that will be really significant for the global emissions.

Steve: Do you envision that the carbon border adjustments could eventually lead to some kind of a global carbon pricing agreement?

Shuting: If we have a uniform global price, that would be ideal, and there would be no need for border adjustments because there would be no carbon leakage. But I would say that it's very difficult. Different countries have different priorities, legislative processes, and considerations. What base are you putting the tax on? If there's tax credits, exemptions or deductions, how are you going to account for that? I think that's really hard. Global pricing is not really realistic, but if each country has domestic carbon pricing policies with a border adjustment, it will eventually push the world to a meaningful carbon price.