But rather than putting himself at the head of a developing-country movement decrying “green” trade barriers, China’s president should heed the domestic voices calling for a more constructive approach to the European initiative.
Xi does in theory have a point. A carbon border-adjustment levy is a trade restriction that can serve protectionist purposes. It is meant to limit so-called carbon leakage by adjusting import prices to compensate for lower production costs in countries with more permissive climate policies. This increases the climate efficiency of domestic efforts, raises their political acceptance at home and lowers the risks of climate free riders.1 But any levy exceeding the cost domestic producers pay for observing emission constraints narrows such a scheme’s overall climate benefit and privileges home-made products in a clearly protectionist way.
In practice, however, the CBAM proposed by the European Commission intends to be fair, transparent and inclusive. The July proposal lays out the EU’s aim to reduce carbon leakage from the EU carbon market (with its high carbon prices and attendant emissions-trading scheme (ETS)) in an effort to be compatible with the World Trade Organization’s rules against discriminating against products made abroad. Like EU-made goods, foreign-made products would be charged the EU ETS price for carbon emitted – minus any carbon price already levied in the country of production and any emissions exemptions EU production benefits from. Also, during a three-year “blank run phase,” levies would be calculated but not charged, giving the EU and its partners until 2026 to tweak the system as problems arise.
CBAM’s impact on China looks set to be limited
Contrary to Xi’s fears the proposal’s impact on China looks set to be limited. At first, the EU levy would be limited to products with a high risk of carbon leaking outside the EU ¬– cement, steel, aluminum, chemicals and electricity. On top of that, the EU’s measure of each product’s “embedded emissions” would include only direct emissions during production, not those generated by inputs or electricity supplied to the production site. Three recent studies expect only a small long-term impact on China’s gross domestic product (GDP) – and one even forecasts a slight boost due to higher EU production costs.2