EU should aim for international “climate club”, not unilateral carbon border tax – govt advisors

The European Union should create a “climate club” with other large emitters instead of unilaterally setting up carbon border adjustment mechanisms (CBAM), the Scientific Advisory Board to the Federal Ministry for Economic Affairs and Energy (BMWi) has said. This would help ensure greenhouse gas reductions, avoid carbon leakage, and create a more level playing field for Europe’s industry. The EU’s CO2 price and carbon trading system may lead to production of industrial goods such as steel or cement being moved abroad where climate standards are less strict (direct carbon leakage) and to falling prices for fossil fuels (due to less demand in the EU) leading to their increased use for energy or industrial production in countries without CO2 pricing (indirect leakage).

If the EU were to introduce a carbon border adjustment mechanism that puts a charge on imports from countries with lower CO2 costs, direct carbon leakage could be prevented, but indirect emission leakage would still occur, researchers Klaus Schmidt, professor at the University of Munich and Gabriel Felbermayr, professor at the University of Kiel and president of the Kiel Institute for the World Economy (IfW) said at a press conference. In their report "A CO2 border adjustment as a building block of a climate club", they suggest instead that the EU teams up with the United States and other large emitters like China to introduce a common minimum CO2 price within the “club” and a uniform carbon border adjustment. “To achieve greenhouse gas reductions, we need CO2 prices of 100 to 150 euros per tonne in the next 10-15 years. Carbon border adjustment is the prerequisite for creating the best incentives within the climate club to switch to low-CO2 production,” Felbermayr said.

Creating such a club with all the negotiations necessary would clearly take longer than the EU unilaterally introducing a carbon border tax, which could be operational as soon as 2023, Felbermayr said. But with the U.S. under the new Biden administration thinking about a national CO2 price, accompanied by their own CBAM, now would be the time to approach them “urgently”, he said. “Establishing a climate club takes longer, but the unilateral solution may have no effect on global warming,” Felbermayr said.