October 2, 2019 / 4:19 PM / 17 days ago

EU leaders risk trade tension with carbon border tax plan to shield industry

LONDON (Reuters) - The new European Union executive risks inflaming international tensions over trade and the environment even before it takes office in November by promising a carbon border tax to shelter its industry from the cost of cutting emissions.

FILE PHOTO: EU flags flutter in front of the European Commission headquarters in Brussels, Belgium October 2, 2019. REUTERS/Yves Herman/File Photo

Previous European Commissions have resisted calls, led by steelmakers and traditionally protectionist France, for a carbon levy on imports to protect Europe’s relatively clean and expensive manufacturers from competition from cheaper production elsewhere.

But fresh momentum has come from increased prices in the EU Emissions Trading System (ETS), the European Union’s flagship instrument for making polluters pay, as well as a rising tide of protectionism led by the United States.

(GRAPHIC: Benchmark European carbon price - here)

Until now, the Commission has handed out free ETS permits to tackle industry’s complaints it is subject to “carbon leakage,” the term used to refer to the possibility high EU compliance costs will drive manufacturing to lower-cost parts of the world.

But from 2021, companies will receive fewer free permits, boosting their costs just as they face investing in expensive new technology to enable the EU to reach a goal of climate neutrality by 2050, in line with the Paris Agreement on curbing global warming.

Some lawyers say the Commission must be prepared to be pulled into trade conflicts or European industry will be destroyed.

“Either the EU prepares itself for and accepts the risk of retaliation or it simply allows other countries to continue with a major artificial advantage which will increasingly destroy EU manufacturing,” Laurent Ruessmann, Brussels-based partner at Fieldfisher law firm, said.

History suggests major powers will respond if the Commission’s proposal ever becomes law.

The United States, China, Russia and other foreign governments, accused the EU of acting beyond its jurisdiction when it tried to include international aviation in the EU ETS.

The attempt to charge all aircraft for their pollution led to threats from China to withhold multi-billion-dollar orders for Airbus aircraft, forcing the EU to suspend the law in 2012.

The United States mission in Brussels, which follows EU policy on behalf of the U.S. government, said it had no comment. No-one from the Chinese government could be reached for comment.

Russian industry leaders said they were introducing their own measures to curb emissions following Russia’s ratification of the Paris climate accord and in principle any EU tax could be discriminatory.

“The ratification of the Paris Agreement, in my opinion, suggests that we cannot be discriminated against,” Alexandra Panina, head of the Russian Council of Electric Power Producers, said.

Panina is also a member of the management board of InterRAO, which supplies power to EU countries, namely the Baltic states.

IMPORTANCE OF DESIGN

Much could depend on the design of any border tax, which so far is entirely unclear and in any case would require years of EU policy-drafting and debate to become law.

In policy guidelines, Ursula von der Leyen, the German president-elect of the new Commission, said she would introduce a carbon border tax, starting with selected sectors.

Acknowledging possible challenges, she said it “should be fully compliant with World Trade Organization rules”.

Italy’s Paolo Gentiloni, who is expected to oversee economic affairs in the new Commission, would have a leading role in the policy debate.

He said last week the design of a border levy must be “carefully crafted to exert political pressure on climate laggards to take action, to ensure that EU companies can compete on a level playing field”.

Harro van Asselt, professor of climate law and policy at the University of Eastern Finland, said trade disputes could be avoided.

“Limiting the measure to trade-exposed, energy-intensive industries is sensible from an economic, environmental and legal point of view,” he said, adding it was also important for the European Union to consult other countries about the measure’s potential impact.

The steel industry, represented by industry body Eurofer, said it welcomes the proposed border tax without commenting further.

Individual companies active in heavy industry in many cases said consideration of how such a complex proposal could be implemented was high on their agendas but it was too soon for public comment.

ArcelorMittal, the world’s biggest steelmaker, has said it wants a carbon border tax, but did not respond to questions for this article.

Industry has not yet said whether it would accept losing other support, in the form of free ETS permits, as demanded by environmental organizations.

The upstream mining sector, which provides coking coal and iron ore to make steel, has acknowledged it needs to address emissions from the use of its products. It has previously called for a global carbon price but so far has been ambivalent about a carbon border tax.

The world’s leading miner BHP, when asked about the idea, referred back to comments from CEO Andrew Mackenzie in July in London.

“I am a free trader. Naturally, when you start talking about border taxes, I get a little bit anxious,” Mackenzie said.

The green lobby, meanwhile, worries that riling China — which, unlike the United States, remains engaged in the ongoing U.N. effort to reduce global emissions — could be counter-productive.

“You risk setting up a massive climate protectionism mechanism and it would not move decarbonization on,” Sam Van den plas, policy director at Carbon Market Watch said.

Reporting by Barbara Lewis and Susanna Twidale; additional reporting by Philip Blenkinsop in Brussels, Valerie Volcovici in Washington and Anastasia Lyrchikova in Moscow; editing by Kirsten Donovan and Jason Neely

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