Newsletter No 4 December 2009

Carbon leakage and the use of border adjustment measures

By Harro van Asselt

epaIn December, countries from all over the world will get together in Copenhagen to agree on climate policies beyond the first commitment period of the Kyoto Protocol, ending in 2012. At this stage, it is still uncertain what kind of agreement will be reached, and what the contents of such an agreement could be. Given these uncertainties, two interrelated problems have been highlighted in the domestic discussions in both the United States and the European Union, namely competitiveness and carbon leakage. Energy-intensive industries argue that they will be adversely affected by climate policies vis-à-vis their international competitors operating in countries with less stringent climate policies. A related yet distinct concern is carbon leakage, which generally refers to an increase of emissions in countries without climate policies due to a shift in production from countries with climate policies in place.
While various policy measures are available to address these concerns, there has been much discussion and controversy about one measure in particular: the use of carbon tariffs at the border. The use of such border adjustment measures is the focus of a recent article composed by IVM researcher Harro van Asselt and Professor Thomas Brewer (Georgetown University, Washington, D.C.). In this article they compare policy discussions in the US and the EU on how to address competitiveness and carbon leakage concerns, with a focus on the role of border adjustment measures. In the EU, the possibility of using these measures has been included in recent revisions of the Union’s emissions trading scheme, while several legislative proposals in the US Congress have also included such measures. The researchers discuss the kinds of measures that have been put forward so far, with a view to addressing competitiveness and carbon leakage. The approaches to the problems in the US and the EU are compared.
It can be seen that while the EU has been sensitive about the issue, and has focused primarily on assessing the extent to which carbon leakage is a problem, several proposals in the US have been more far-reaching. They aim to include measures directly into new legislation. However several concerns have been raised about border adjustment measures, including their economic and environmental effectiveness, their legality in the light of the rules of the World Trade Organization, and their impacts on the post-2012 climate policy negotiations. Against this background, the article discusses the possibility of international cooperation on border adjustment measures. It concludes that two kinds of cooperation are needed between the EU and the US. Not only cooperation through formal international negotiations, but also cooperation through international learning processes is important. The EU and the US have to learn from each other about design and implementation issues as they develop their respective cap-and-trade systems.

Reference: Asselt, H. van & Brewer, T. (2010, forthcoming). Addressing Competitiveness and Leakage Concerns in Climate Policy: An Analysis of Border Adjustment Measures in the US and the EU. Energy Policy

For more information you can contact Mr. Harro van Asselt, harro.van.asselt@ivm.vu.nl