Forget Carbon Border Tax, Leading EU Researcher Tells Commission

(Bloomberg) -- The European Commission should scrap the idea of a carbon border tax and favor incentives for energy-intensive companies to create a greener future, a leading research group concluded.

The recommendations from Brussels-based Bruegel add to the debate about how the European Union can put into practice a commitment to zeroing out fossil fuel emissions by 2050 without scaring off industry.

Ursula von der Leyen, who takes office as EC president in the next few weeks, favored a carbon border tax to protect industry from competition overseas where environmental regulations are more lax. Bruegel said that levy probably will be too controversial to win support and that incentives may accomplish the same goal.

“Let's not waste five years of political capital on things that will difficult to implement,” said Simone Tagliapietra, one of the authors of the Bruegel report, which will be published next week. “For the Green Deal to be put into practice, we need to be pragmatic.”

The current system involving the EU Emissions Trading System has driven up the cost of pollution, forcing heavy industry from steel to cement makers to think twice about expanding in the region. That is encouraging the phenomena known as carbon leakage, where emissions move abroad with jobs and industry.

Von der Leyen's goal is to bring the EU in line behind a target to eliminate carbon emissions by 2050, a dramatic steepening of ambition over the current pledges. Bruegel said the mechanisms set up to achieve that goal will determine whether industry can continue to flourish.

Carbon border taxes are problematic because they're likely to aggravate trade tensions. U.S. President Donald Trump already has threatened to hit European automotive goods to retaliate against support for Airbus SE. A carbon border tax would drive up the cost of imports into Europe. Also, it's difficult to design such a tax while complying with World Trade Organization standards designed to smooth the flow of goods and services across borders.

Bruegel's alternative is support “clean companies,” with the EU awarding subsidies to businesses that produce internationally traded goods with lower emissions. The value of these subsidies per ton of reduced pollution might be significantly higher than the current carbon price in the ETS.

“The EU should address leakage concerns in a way that does not jeopardize its vital interest in trade,” the researchers said. “In our view appropriate carbon border measures would consist of carbon rebates for exports as well as a support scheme for low-carbon production of otherwise emissions-intensive products.”

The Bruegel recommendations on carbon pricing under the Green Deal also include:

• Convergence towards a single carbon price for sectors both in and outside the ETS
• Minimum carbon price in non-ETS sectors such as transport, heating and potentially agriculture
• Strengthening the ETS by providing investors with clearer guidance on future prices; one option is to give the European Investment Bank a mandate to sell guarantees that protect investors against low carbon prices
• Earmarking a bigger share of government revenues from emissions pricing for green initiatives

To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Stuart Wallace

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