JK raises 4 objections to CBAM:
1. many carbon prices are weaker than they look
2. complex to calculate embodied carbon
3. could fuel trade wars
4. might not recognize voluntary business emissions cuts
1. is important! There’s lots of free allocation or tax-free thresholds in every carbon pricing scheme, largely to secure trade exposed industry. Ignoring Europe’s free allocation would make CBAM discriminatory. Ignoring others’ would make CBAM ineffective at leveling the field.
There are two answers to 1!
a) CBAM should adjust for the gap between free allocation and EU industry average emissions (in the ‘leakage sectors’ of concern). Allocation can then phase down (fraught and delicate) and CBAM phase up.
b) CBAM should by default *ignore other countries’ policies*. It is very hard to assess ‘effective carbon costs’ overseas. It also violates GATT Art I:1. CBAM can level the playing field by treating all imports of a given product the same. Maybe better data, laws help later.
2. is also real. Cargo-by-cargo life cycle analysis would be monstrously hard! But it’s not needed. EU has good data on emissions intensity of relevant goods production in Europe. Using that as the adjustment benchmark is straightforward and nondiscriminatory.
3. doesn’t need to come true. A non discriminatory, WTO-compliant CBAM (as EU has promised) would be a bigger sign of respect for the trading order than anything that’s happened in the last 4 years!
4. needs rethinking. The CBAM options I’ve described would not give any advantage to overseas suppliers with voluntary reductions. But:
a) they have no advantage today without CBAM;
b) they will suffer no disadvantage in practice with CBAM - because ... <drumroll>
This is a big deal. Today EU emissions intensive trade exposed (EITE) biz can’t pass carbon costs on to customers, as latter can buy imports with no C cost. That’s the reason for free allocation.
If post-CBAM every supplier faces a C cost, customers can’t escape except by
A) buying different goods (maybe cross-laminated timber instead of cement)
B) buying from EU suppliers who are significantly cleaner than the EU average
So selling prices for steel, cement etc would increase to reflect average EU carbon costs. Importers’ costs would go up, but so would their revenue. If they stop and think (they may not!) they will find they’re no worse off than the status quo.
The approach I’ve sketched would seek to comply with GATT Arts I-III in full, not rely on the environmental defenses in Art XX. The latter would seem to require the deep cargo-by-cargo analysis that is so hard in practice.
Maybe over time better global data, bilateral data-sharing, policy coordination and WTO reform can allow a more nuanced approach to be practical and legal.
But in the meantime there is a practical pathway for a CBAM that achieves the primary objective: allowing EU to deepen its emissions targets and pricing without loss of competitiveness.
Is this what EU CBAM will actually look like? We should wait and see what the Commission proposes in June; and what eventually emerges from the sausage machine. But it would make a lot of sense to do it this way in practice. /end
Addendum! Bless John for writing the piece, I am a total tragic on this subject and there could be few more delightful morning gifts than the opportunity to bloviate upon it!
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