European Union Border Adjustment

European Union Border Adjustment

Laser Talk

Question: How will the upcoming EU border adjustment affect U.S. climate policy?

Answer: One of the pillars of effective carbon pricing is a border carbon adjustment that equalizes carbon costs for domestic and foreign manufacturers. It’s a system of levies on imports and refunds on exports to balance carbon pricing impacts. This not only maintains a level playing field for businesses, it also discourages companies from “off-shoring” their carbon emissions by relocating to countries that do not price carbon. [1]

As Europe’s carbon prices increase, the European Union (EU) plans to institute a Carbon Border Adjustment Mechanism (CBAM). [2] This policy, which will be phased in from 2023 to 2026, [3] will have an impact on American exporters. But if the U.S. were to enact a fee and dividend policy with a price that matched or exceeded Europe’s, American companies trading with the EU would almost certainly be able to avoid that border levy. In short, to maintain trading parity with Europe, the U.S. needs to price carbon.

Depending on how the CBAM is structured, the relative carbon efficiency of U.S. industry may also confer an inherent trade advantage compared to most of our non-EU trading partners. [4] Because of this, the U.S. would be wise to promptly enact carbon pricing, in coordination with the EU, to preserve that potential trade advantage with non-EU economies.

If the U.S. and Europe both price carbon with a border adjustment, the trading leverage of these two economic giants would pressure other nations to follow their lead. This is not just speculation; both China [5] and Russia [6] have made it clear that a one-way CBAM from the EU will be costly to them, and are adjusting their own carbon pricing ambitions accordingly. [7,8] This should be helpful in the fight to reduce global emissions.

In a Nutshell: The European Union has decided to enact a carbon border adjustment mechanism in 2023, which would put non-EU businesses at a trade disadvantage unless they enact their own carbon pricing policy that also features a similar border adjustment. This means us.

  1. Flannery, B.P. “Carbon Taxes, Trade, and Border Tax Adjustments.” Policy Brief No. 16-02. Resources for the Future (Apr 2016).
  2. Molyneux, C.G., P. Balás, and P. Mertenskötter. “Twelve Things to Know About the Upcoming EU Carbon Border Adjustment Mechanism.” Covington Global Policy Watch (16 Jun 2021).
  3. Taylor, K. “Carbon border levy should be in place no later than 2023, EU lawmakers say.” Euractiv Media Network (8 Feb 2021).
  4. Rorke, C. and G. Bertelsen. “America’s Carbon Advantage.” Climate Leadership Council (Sep 2020).
  5. Xu, M. and D. Stanway. “China says EU’s planned carbon border tax violates trade principles.” Reuters (26 Jul 2021).
  6. Morgan, S. “Moscow cries foul over EU’s planned carbon border tax.” Euractiv Media Network (26 Jul 2021).
  7. Early, C. “The EU can expect heavy pushback on its carbon border tax.” China Dialogue (01 Sep 2020).
  8. Korsunskaya, A. and A. Marrow. “Russia considering own carbon tax as EU prepares one -Vedomosti.” NASDAQ (23 Sep 2021).

This page was updated on 10/17/21 at 23:24 CDT.