The post-Brexit UK could find itself on the outside of a new carbon border with the European Union.
The proposal for a carbon border is mentioned in the mission letter from the President-elect of the Commission Ursula von der Leyen to the Commissioner designate for trade Phil Hogan.
In the letter, von der Leyen writes: “I would like you to contribute to the design and introduction of the Carbon Border Tax, working closely with the Commissioner for the Economy. The Carbon Border Tax should be fully compliant with WTO rules.”
The measure, sometimes known as a border carbon adjustment (BCA) mechanism, is intended to make up the difference between EU carbon taxes and those from other countries with low or no carbon taxes.
In the past year, Von der Leyen has suggested that she wants to use the measure to prevent carbon leakage where carbon intensive activities move or are sourced from outside the EU to avoid paying the carbon taxes but are then imported, hence the tax.
However the UK, after a ‘No deal’ Brexit looks set to sit outside the carbon border as it will be leaving the EU’s Emissions Trading System (ETS). UK plans for a carbon tax appear to set UK carbon pricing below that of the EU potentially setting up a clash.
A report published earlier this month from the House of Commons Library says: “The level of the UK’s involvement or future cooperation with EU climate change efforts, in particular the EU emissions trading system, remains subject to ongoing negotiation.
“In a no deal scenario, the UK would not remain part of the EU ETS and the Government has put in place legislation for a carbon tax to continue carbon pricing in the short term.
“In the longer term, in a May 2019 consultation, the UK Government and the devolved Administrations stated that securing an agreement with the EU for a linked UK emissions trading scheme is their preferred option for the future of carbon pricing after Brexit.
“However, this requires agreement from the EU and therefore several alternative options are being consulted on and considered.”
For now, the UK may put in place its own ‘No Deal’ carbon tax, which has been confirmed by the Johnson administration at £16 per tonne with the tax rate for 2020 to be announced in the next Budget.
This potentially puts UK carbon pricing at odds with the EU. Although the ETS is more flexible, this summer it has been pricing carbon at around €28 per tonne or £25 or as much as £9 cheaper.
With so much up in the air, it remains unclear whether matters will be resolved as part of a deal, become part of a transition arrangement or become yet another source of disagreement.
The idea of a carbon border has gained wider currency than just the European Union.
A remarkable 3554 US economists including 27 Nobel Laureates have signed up to a statement in support of the idea of a carbon tax.
But they also support, a border carbon adjustment system, a system they say would “enhance the competitiveness of American firms that are more energy-efficient than their global competitors. It would also create an incentive for other nations to adopt similar carbon pricing”.
Experts suggest that all border carbon adjustment arrangements should be World Trade Organisation compatible.
In a blogpost published earlier this summer, the EU based thinktank Bruegal wrote: “It is crucial that the EU’s BCA be WTO-compatible. This would ideally be addressed through negotiations in the WTO about permissible BCAs. The current US Administration, and some other governments may not be interested in participating in such negotiations now. However, the EU and a group of like-minded WTO members should develop a proposal for a WTO agreement, which may eventually be adopted by all WTO members.”
Europe for the digital age
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