Consumption levy more 'pragmatic' than CO2 border

A consumption levy would be a more "pragmatic" approach than the carbon border adjustment mechanism planned by the EU, and should be considered for at least an introductory period, think-tank German Green Budget (GBG) says.

A consumption levy would not just be easier to implement than an outright carbon border adjustment mechanism in terms of compatibility with World Trade Organisation (WTO) rules. It would also better take into account the situation in developing countries, which will need help and more time to comply with the standards, GBG scientific director Swantje Fiedler said at an online event last week.

Under a consumption levy, standard emissions values would be set for every product sold within the EU, with the option of providing evidence for emissions that are individually lower. And it would be relatively easy to introduce a high CO2 price under a consumption levy compared with under a carbon border, where it would raise serious questions regarding WTO rule compliance, Fiedler said.

A consumption levy would avoid the tricky issues of benchmarks and export rebates currently debated as part of a carbon border mechanism. The products benchmarks heard to be discussed at EU level are likely to be considered discriminatory under WTO rules, energy think-tank Agora Energiewende senior adviser for industry Oliver Sartor warned.

But the "biggest" problem, according to Sartor, is the issue of export rebates aimed at protecting EU companies exporting to a global market. While a carbon border adjustment mechanism can be made to comply with WTO rules, this is no longer the case with export rebates, Sartor said.

GBG's Fiedler argued that the windfall effects of a consumption levy should be accepted, as the levy would apply for an interim period only.

Fiedler pointed to a study recently presented by research institute IASS in Potsdam, which argues that a country's exposure to trade with the EU, and its "vulnerability" in terms of adapting to the situation through a change in its export structure or carbon intensity, determines how different countries are likely to cope with a carbon border adjustment mechanism.

IASS warns in the study that the current carbon border debate is one-sidedly focused on the issue of compatibility with WTO rules, and on possible implications for EU relations with countries such as the US, Russia, or China. The implications of a CO2 border for developing countries, particularly in Africa, and the ways in which the mechanism should encourage decarbonisation in these regions, are barely mentioned, IASS says.

For instance, some countries with relatively low carbon emissions compared with the EU average will struggle to comply with the measurable, reportable, verifiable (MRV) obligations.

EU plans provide for proceeds from the carbon border adjustment mechanism to be ploughed into the bloc's recovery fund. The bloc should additionally use the funds to support decarbonisation efforts in low-income countries, Sartor said. But revenues from the mechanism are a less secure source of funding than those from the EU's emissions trading system (ETS), Sartor cautioned.

EU-US co-operation

And Sartor warned that as long as the US has no national carbon price, and does not intend to introduce a national ETS, an EU-US debate on a carbon border, or even ideas of a joint carbon border adjustment mechanism zone, are pointless.

US officials have been heard to demand the EU give it more time to deal with a carbon border adjustment mechanism, the head of global climate policy at Berlin-based consultants Adelphi, Dennis Taenzler, said at another event last week.

Luxembourg energy minister Claude Turmes, a former Green member of the European Parliament, suggested that the EU and the US initially focus their co-operation on how to protect their industrial sectors under pressure to decarbonise from non-compliant imports. This could be the starting point of EU-US climate co-operation, Turmes said.

The US and EU "quickly need one or two joint projects", German opposition Green Party's climate policy spokesperson Lisa Badum said. This could take the shape of a "transatlantic hydrogen partnership", Badum suggested, or of a partnership in the automobile sector.

Now is probably the easiest time for US president Joe Biden's administration to seek compromises over climate policy with the opposition Republicans, given the need to co-ordinate over measures to overcome the effects of the Covid-19 pandemic, Taenzler said.

By Chloe Jardine