Climate Change Is Coming for Global Trade

Despite their interconnectedness, these issues are mostly considered in silos. The 2015 Paris climate change agreement devotes not one clause to trade. And the sectors underpinning it—aviation and shipping, whose emissions are growing by 3-5 percent annually—are not covered either. Similarly, the 2001 Doha Ministerial Declaration—which set the parameters for the stalled Doha round of trade negotiations—does not mention climate change. As a result, sizable chunks of the global economy have fallen between the environmental protection cracks.

Perhaps more important, the rapid growth of international trade also makes striking an effective global climate agreement more difficult.

China’s emergence as a trading superpower has given rise to fears of so-called “carbon leakage,” which occurs when costs related to complying with climate policies drive businesses to transfer production overseas in pursuit of laxer rules. If the European Union or United States makes polluters pay for their greenhouse gas emissions, the fear is that the polluters would simply offshore production to China or another emerging economy, yielding no net environmental benefit. But if developed countries don’t act, emerging economies never will.

Although studies find little evidence of leakage in practice, its specter has long loomed large. In the United States, it was ostensibly a fear of leakage, among other things, that led the Senate to unanimously rule out ratifying any climate agreement that left economies such as India and China unbound by carbon targets in the run-up to negotiating the Kyoto Protocol in 1997. More recently, President Donald Trump invoked similar concerns when repudiating the Paris agreement, which he has pledged to leave. He argued that the deal “disadvantages the United States to the exclusive benefit of other countries,” citing “lower wages, shuttered factories, and vastly diminished economic production.” Within the EU, the danger of leakage has also been a major concern. Under the EU’s flagship climate policy—its emissions trading scheme—energy-intensive industries receive free carbon credits so that they are protected from competition from abroad.

A carbon tariff has received considerable attention on both sides of the Atlantic as a means of addressing carbon leakage and breaking the deadlock of international climate action. Such a scheme would involve applying a tariff to imports from countries that have not already accounted for their carbon emissions. However, past efforts to set up a border adjustment have been resisted.

In 2010, then-French President Nicolas Sarkozy proposed a border adjustment for the EU, but Karel De Gucht, who was the European commissioner for trade, objected on the grounds that it could lead to retaliation. In 2017, the current occupant of the Élysée Palace, President Emmanuel Macron, proposed a similar carbon tax at Europe’s borders, but there were again concerns that it would ignite a trade war with the United States and China. In the United States, meanwhile, politicians across the aisle have considered border adjustments as a way of winning allies for climate action among energy-intensive industries that fear carbon leakage. It was for this reason, for example, that a border adjustment provision was included in the 2009 American Clean Energy and Security Act, which did not pass.

But past failures have not stopped efforts to revive the idea of a border tax. In July, Ursula von der Leyen, who is now the president-elect of the European Commission, promised in a speech to the European Parliament to introduce “a carbon border tax to avoid carbon leakage.” A year earlier, in the United States, then-Rep. Carlos Curbelo, a Florida Republican, introduced a federal carbon tax bill in Congress that proposed a “tax equivalent to the domestic carbon tax” for importers. This year, Sen. Mitt Romney was also said to be “looking at” a carbon tax and border adjustment. Furthermore, two leaders for the Democratic presidential nomination, former Vice President Joe Biden and Sen. Elizabeth Warren, have proposed fees on carbon-intensive imports as a means of protecting American workers and advancing climate action around the world.

Given these political developments, it is worth considering the prospect for a coordinated EU-U.S. initiative when the next window of opportunity opens up. Coming from the two largest markets in the world, whose economies are responsible for approximately half of global GDP, a joint carbon border tax would represent a seismic shift in international climate diplomacy.

From an EU perspective, the benefit of joint action is clear—it would remove the risk of retaliation from the United States. From a U.S. perspective, the main benefit would be to win a solid ally in its increasingly frayed trading and geopolitical relationship with China. Acting with the EU could also help rejuvenate the United States’ standing as a global climate leader, whereas going it alone risks associating border taxes with strong-arm tactics. Another major benefit of working together on such a carbon initiative would be to bolster the trans-Atlantic relationship, which is—according to many commentators—in crisis.

The biggest barrier to a coordinated move would be the risk of a backlash from major emerging economies. Given the greater historic responsibility of the EU and United States for climate change, and their above-average emissions per capita (especially in the United States), countries such as China, Brazil, India, and South Africa continue to argue that the primary onus remains on developed economies to take action. They would likely see a border adjustment as inconsistent with the principle of climate justice—or “common but differentiated responsibilities”—which is enshrined in U.N. climate treaties.

But a number of steps could be taken to minimize the risk of retaliation. Ideally border adjustments should be phased in, with exports from economically advanced climate laggards like Australia, Japan, Saudi Arabia, and South Korea targeted first. Even if a phased approach were deemed incompatible with the World Trade Organization principle of nondiscrimination, small island states and lesser developed countries could be exempted. Furthermore, a portion of the proceeds from a carbon tariff could be used to fund a major initiative aimed at building resilience and supporting low-carbon investment in the most vulnerable and least developed countries, thereby adding moral and political weight to the cause.

Although a border adjustment would inevitably be denounced as “green protectionism” in some quarters, an equitably designed approach, arising from a transparent process and predictably implemented, could win hearts and minds.

Following three decades of climate gridlock and rising emissions, new thinking is required to break the deadlock. But emerging economies are waiting for the United States to act, whereas the United States has refused to put itself at a competitive disadvantage to its emerging global rival, China. The EU, meanwhile, lacks the power to achieve its objective of promoting global action on its own, and a partnership with the United States remains the best option to amplify its global influence. With the reemergence of great-power rivalry on the international stage, border adjustments arguably offer the only realistic path forward. And if a solution cannot be found, international trade itself will eventually be the victim of increasingly disruptive climate change, leaving everyone worse off.