Industry News

EU Contemplates More Flexible Carbon Adjustment

Nov. 30, 2021
By: David G. Forgue

We have previously discussed the developing issue of accounting for carbon in international trade. At the moment it seems very likely that there will be some sort of carbon regulation between the major trading countries and blocs. However, the open question is whether the various regulations will be compatible with each other without overly impeding trade. This is important because a system that functioned well would reward clean manufacturers and disadvantage heavy polluters. A poorly functioning system stands to disadvantage all manufacturers.

In our previous article we briefly discussed the difference between cap-and-trade models (as contemplated in the EU) and other non-price carbon adjustment models that include calculations based on laws and economic calculations (the US model). There seems to be no political will in the US for a cap-and-trade market and the EU had not appeared willing to reach agreements with trade partners who did not have cap-and-trade markets. This split threatened to greatly complicate cooperation between the two entities, especially as it related to encouraging cleaner manufacturing in places like China and India.

However, a recent draft report from the European Parliament Committee on International Trade contemplates moving away from a cap-and-trade requirement for agreements with other countries. Instead, the report noted that countries using the “polluter pays” principle in their national treatment of carbon should be considered partners in the global effort to cut carbon emissions. This draft report sets forth a potential path by which the EU and US could cooperate going forward and can be seen as building on elements of the 232 deal between the EU and US. It also reflects a will in at least parts of the EU to find solutions in the carbon emissions discussion between two of the world’s largest trade partners.

The devil in any partnership would be in the details. Presumably the EU would need to develop a means to evaluate the laws in other countries in order to be able to establish a reasoned carbon adjustment charge for imports. This is already the sort of system the United States is contemplating. It is easy to see the implementation of such calculations being subtly but importantly different across different implementing agencies. One can imagine the entire process looking very much like the calculation of antidumping and countervailing duties, with all of the complexity inherent in those calculations.

Because of the potential complexity of such a system, companies engaged in international trade would be wise to keep an eye on developments in this space. If you have any questions about EU/US trade or the impact of the Paris climate accords on international trade please feel free to contact any attorney at Barnes, Richardson & Colburn.