Carbon Tariffs Update: NZ, EU Oppose

Two brief developments in the carbon tariffs debate:

• "Speaking at the Royal Institute of International Affairs at Chatham House in London last night, where he is engaged in bilateral meetings ahead of the Copenhagen Summit, Trade and Associate Climate Change Minister Tim Groser said the moratorium would allow space to implement climate friendly policies. It would also explicitly rule out unilateral border tax adjustments – a very bad idea likely to spark a trade war, he said."

• In an interview with EurActiv, the EU's Environment Commissioner Stavros Dimas speaks against carbon tariffs, but doesn't expressly rule them out:
  

EA: The draft US climate bill foresees some kind of border adjustment mechanism to avoid jobs and industries relocating abroad due to different levels of commitment on climate change across countries (so-called 'carbon leakage'). The idea is strongly supported by President Sarkozy of France and could be compatible with global trade rules, according to a recent WTO report. Would you support such measures? Under what conditions? 

SD: The best way of avoiding carbon leakage and competitiveness problems is to get a comprehensive global agreement in Copenhagen. That would obviate any calls for measures along those lines. 

Let's not forget that border measures have a number of pitfalls. While they may offer some relief to energy-intensive industries, there would be important negative side effects for other industries, sectors and consumers. 

Input prices for industry would rise, and this could push up the price of our exports and reduce export competiveness. That could even lead to the price of emission allowances being driven up as well.

Despite what you say about that WTO report, their political acceptability is invariably problematic, because border measures go against the basic thrust of trade liberalisation and are necessarily perceived as protectionist in nature. There is always a risk of retaliation, and they could lead to a race between countries to establish similar measures. BusinessEurope argues against border measures notably on these grounds. 

And then of course they would be complicated from an administrative point of view. Compliance would be burdensome for traders, and that would also push up costs.

EA: Do you think such a border adjustment system is compatible with the EU's existing agreement to allocate free emissions rights under the Emissions Trading Scheme (ETS) to energy-intensive industries after 2013? Could both systems run in parallel or are they mutually exclusive? 

SD: As I said, we believe that the best way to create a level playing field and avoid carbon leakage is to make sure that we have an ambitious agreement in Copenhagen and later. This said, the revised ETS is addressing the risk of carbon leakage and foresees that allowances will be allocated for free for sectors exposed to a significant risk of carbon leakage. 

That's why the EU is opting to allocate allowances for free instead – on the basis of ambitious benchmarks – in sectors judged to be especially at risk, with a slower phase-in of full auctioning for energy-intensive sectors and sub-sectors. This is definitely one way to address this particular risk. 

Now, the revised directive also foresees that the Commission will be looking at the situation in the light of the outcome of Copenhagen and would then consider various options, including a border adjustment mechanism.

It's sure nice to see some sanity from the developed world on this issue.