This is a response by Aaron Cosbey to the July 1, 2022 IELP Blog Guest Post by Bixuan Wu: The EU’s CBAM
The author concludes that the EU’s CBAM is primarily about pressuring other countries into raising domestic carbon prices. This is not so. It’s primarily aimed at enabling high EU carbon prices without leakage – leveling the playing field. This is explicit in the stated objectives, where policy change in other countries is not mentioned, and it is consistent with the design of the regime.
The distinction is important. The author uses the example of a high-emitting steel firm that pays a high domestic carbon price vs a low-emitting steel firm that pays a low domestic carbon price, showing that under the right circumstances the high emitting firm might end up paying a lower EU CBAM levy. If the objective of the CBAM is leveling the playing field, then that’s not a surprising or an undesirable result – it’s internally consistent. Both firms will ultimately have been charged equally for the carbon embedded in their products.
But, the author argues, it’s not just about the explicit carbon price. Surely firms in other countries bear costs of climate regulation that are not in the form of an explicit carbon price.
What is the author asking for? That the EU should tally up the carbon costs – both regulatory and explicit – imposed on foreign firms in their countries of production to arrive at a CBAM credit? That would, by the way, also mean increasing the CBAM import charge by the amount of the regulatory carbon costs imposed on EU firms – a detail too often overlooked by those that argue for non-price-based crediting.
There would be problems with such a regime. First, what exactly to include as climate-related regulations? Second, how to fairly translate those into prices? (The author rightly argues that this would be daunting, in the context of the US FAIR Act.) Third, it would be a monumental effort to do that for all trading partners, and to keep the data current. Fourth, imposing domestic non-price regulatory costs on importers would be WTO illegal for the same reasons countries can’t, for example, charge imports for corporate tax rate differentials.
Moreover, it’s not even clear that such a regime is needed. If the foreign regulatory burden on covered firms is stringent, the affected firms will presumably respond by lowering emissions intensity – that’s the point. And if they do so, while they won’t be rewarded by a CBAM that credits for foreign regulatory policy, they will be rewarded by a CBAM that credits for lower emissions. That is, since the CBAM is based on actual emissions, their levy will be reduced.
The author finds the recent US Clean Competitiveness Act (CCA) proposal preferable to CBAM, arguing that it focuses on GHG intensity (“greenness”) of production, rather than national carbon pricing. Some thoughts on that:
- The GHG baselines in the CCA are a transitory feature that over time zero out to leave straight-on explicit carbon pricing, and matching border charges.
- Under the CCA, foreign producers would pay that border charge regardless of whether they’d already paid a carbon price domestically. I can’t see foreign producers being happy about the lack of crediting though, on fairness or environmental grounds; the CBAM seems preferable.
- Unlike the CBAM, the CCA actually does venture into judging the adequacy of other countries’ regulatory regimes. It would allow actual GHG intensity data to be declared only by producers in “transparent economies with reliable, verifiable data” (as determined by the relevant US Agency). Others, such as Chinese producers no doubt, would be subject to a default equal to the economy-wide GHG intensity, no matter how clean their individual operations might be.
