Net-zero plans and EU climate leadership

Spurred on by a new generation of climate activists and characterized by a scorching summer, 2019 has seemingly become the year to tackle climate change once and for all. But what are we doing to challenge rising temperatures, and are we offering too little too late?

The European Union (EU) is at the forefront of this challenge and is expected to adopt a plan to cut EU carbon emissions to “net zero” by 2050, joined by a growing number of nations poised to implement tough climate goals and radically reduce their greenhouse gas emissions within a generation. Following the UN climate summit held in New York on 23-25 September, 65 countries and the EU were joined by 10 regions, 102 cities, 93 businesses and 12 investors – all committed to net zero CO2 emissions by 2050″[1].

The net-zero plan would mean drastically cutting CO2 emissions, while any remaining emissions would be captured or offset.  At a time when many EU Member States still fail to reach their respective emissions targets[2], this plan would cause a substantial shock to the EU’s decarbonization policy – as well as spur on changes to decarbonization policies around the globe. Prominent voices such as Nicholas Stern, Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, argue that even more countries could follow suit and adopt net zero targets as the EU “could start a race to the top”[3], projecting climate leadership. Importantly, the EU could be an encouraging example to China, the world’s largest CO2 emitter in absolute terms. Although dozens of the world’s largest cities, such as New York, Paris, Stockholm, Los Angeles and London have already adopted net zero goals, introducing such goals across the global economy is a giant leap as it would not only involve the traditional energy-intensive industries, but would shift an entire economy towards carbon neutrality.

The net-zero policy is a game-changer in that it sets a clear goal: no more carbon in the atmosphere by 2050. However, if these promising initiatives in the fight against climate change aren’t followed by countries across the globe (particularly large polluters), they will be unable to meet the Paris Agreement’s objectives and mitigate the devastating effects of global warming. In addition, policymakers should also think about the scope of this policy and define each and every emission covered by it, since carbon dioxide is not the only elephant in the atmosphere. Regardless, it is clear that net-zero plans should be considered as strong starting points and one of multiple components needed to address generations worth of climate damage.

In addition to encouraging other nations to pursue net zero policies, the EU is internally incentivizing companies to reduce their emissions through their EU emissions trading system (EU ETS), another important component in the fight against climate change. The EU ETS is a ‘cap and trade’ system, introducing a cap on emissions while allowing companies to buy and sell emission allowances, according to supply and demand. Moreover, the EU ETS incentivizes companies by creating a clear long-term vision and regulatory stability, both necessary for investors in zero-carbon technologies, like a net-zero plan. However, an ongoing EU policy discussion flared up during this year’s European elections on how to strengthen the EU ETS through extending its scope to additional sectors and raising the price on carbon.

Despite these flaws, the EU’s net-zero plan and the EU ETS are important instruments to reducing CO2 emissions…in the EU. This raises the important question of how the EU can further project its climate policies externally, but also how it is calculating the effectiveness of these internal carbon-reducing policies in a global economy.

Imported emissions and carbon leakage

Indeed, one well-known implication of the EU ETS is the issue of carbon leakage, where companies choose to keep or even move their production facilities outside the EU to avoid paying the emissions fee.  Experts warn that if wealthy nations adopt net zero targets it would simply push more carbon pollution overseas as targets exclude the carbon footprint of imported goods — a significant source of emissions for western economies. UK government data, for example, shows that including “imported” emissions increased the country’s total footprint by 70 per cent, significantly reducing their achievements over the past three decades. As Professor Dieter Helm, Professor of Energy Policy at Oxford University, told the Financial Times: “All these great efforts in Europe are presented as great triumphs…but these are all production numbers and they do not include [carbon] consumption,” adding, “that’s the really big challenge…what we are going to do about that”[4].

Similarly, France only represents 1 per cent of global greenhouse gas emissions – according to domestic emissions[5]. However, France imports products that created emissions in the countries in which they were produced or through which they were transported. Indeed, in 2017, the actual carbon footprint of France was 1.7 times higher than the national emissions recorded.

This raises the so far unanswered question of how we should calculate national emissions. National inventories offer a distorted picture of the country’s emissions, only accounting for domestic emissions which are often far less than their actual consumption. Including the C02 emissions embedded in trade and outsourced to third countries would offer a more accurate account of a country’s emissions, bringing more nations to account for their impact on the environment.

Introducing a carbon tax at the EU border?

The challenge would therefore be to introduce a carbon inclusion mechanism at the borders of net zero countries and, starting with the EU, level the playing field with global competitors. This could be achieved through a Carbon Border Adjustment Tax (CBAT), which would essentially introduce a tax on products imported into the EU, based on their carbon footprint.

Despite the current lack of specifications, such as what materials the CBAT would cover or how the carbon footprint of a certain product would be calculated (and perhaps certified), the concept is increasingly considered an effective solution to tackling climate change abroad, prevent carbon (and jobs) leakage from the EU, and protect the competitiveness of EU industry by guaranteeing a more level playing field with industry in third countries. The political consensus for introducing a CBAT has accelerated over the past few months, with clear statements of support by Commission President-elect von der Leyen and a strong push from the Macron government (following France’s earlier attempts in 2009). In addition, the S&D group, Renew Europe (formerly ALDE), as well as the Greens explicitly supported the idea of a CBAT in their European election manifestos. Christophe Hansen, trade coordinator for the EPP (von der Leyen’s political group), was recently reported as saying the EU needs to protect its industries by introducing a CBAT.

However, whatever form it might take, the introduction of a CBAT would have significant implications on companies’ business models and success, regardless of whether they primarily produce products internally in the EU, and / or import products or materials into the EU. In addition, under the EU ETS, some sectors deemed at risk of carbon leakage receive a higher share of free ETS allowances.[6] These sectors could be heavily impacted by a CBAT and may no longer receive free allocations since the CBAT would protect them against carbon leakage, removing the primary argument in favor of their free allowances.

The compatibility of a CBAT with international trade law has already been put into question, both from a legal perspective and a technical perspective. Indeed, pursuant to WTO law, the measure must not result in a hidden trade barrier. To avoid this, the border charge on import should – unless it falls under certain exemptions – be equivalent to the tax on the corresponding domestic product. But because the EU legislation applies in the form of a cap and trade, it will be difficult to determine the value of a border tax that would justify similar treatment.

The CBAT will undoubtedly be fiercely debated over the coming months and years. In July, the French Council of Economic Analysis (CAE) and the German Council of Economic Experts (GCEE) published a Joint Statement arguing “these proposals [including a CBAT] need to be analysed and discussed in detail. It will be particularly important to avoid that such measures are utilized as protectionist measures”.[7] One topic that has remained largely untouched in the debate is that a CBAT could very well lead to downstream price hikes for end-stream consumers (businesses and private individuals). But are policymakers able to introduce measures to compensate for this, and are they ready to be held to account for their likely consequences? This effort seems small when our planet continues to burn at great speed.


[1] United Nations: https://www.un.org/sustainabledevelopment/blog/2019/09/in-the-face-of-worsening-climate-crisis-un-summit-delivers-new-pathways-and-practical-actions-to-shift-global-response-into-higher-gear/. September 2019

[2] Climate Action Network Europe: http://www.caneurope.org/docman/climate-energy-targets/3357-off-target-ranking-of-eu-countries-ambition-and-progress-in-fighting-climate-change/file. June 2018

[3] Financial Times: https://www.ft.com/content/932b99f0-8e7e-11e9-a1c1-51bf8f989972. June 2019

[4] Financial Times: https://www.ft.com/content/932b99f0-8e7e-11e9-a1c1-51bf8f989972. June 2019

[5] Le Monde: Voiture, industrie, viande… Quelles sont les causes du réchauffement climatique en France? July 2019

[6] European Commission: https://ec.europa.eu/clima/policies/ets/allowances/leakage_en. Accessed on September 2019

[7] CAE is an independent academic economic advisory board reporting to the French Prime Minister. GCEE is a similar council that makes macroeconomic recommendations to the German government. Source: https://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/Pressemitteilungen/2019_07_16_CAE_GCEE_JointStatement_AUniformCarbonPriceForEurope.pdf