The border adjustment mechanism proposed by the European Commission, MAC, is intended to reduce imported CO2 emissions. An attractive initiative on paper but the implementation of which is a real headache because it conflicts with the trade negotiations conducted by the same Commission.
The European Commission has launched a public consultation on the Carbon Adjustment Mechanism (CAM). All European citizens are invited to give their opinion on this central element of the Green Deal by filling out a questionnaire on the Commission website by 28 October. In France, President Macron is counting on the MAC to finance the recovery plan. Is this a way of bringing back the carbon tax swept away by the yellow vests in the French political debate? This is indeed a measure that has the flavor of the carbon tax since it is backed by the same tax base, the carbon footprint. However, unlike the carbon tax, the MAC does not put a strain on CO2 emissions during the use of the product (for example, automobile fuel) but on the volume of CO2 emitted during its production. In addition, only products imported into the European Union (EU) are eligible.
In MAC, the term 'adjustment' refers to the difference in cost between products produced within EU borders and imported products, a difference attributable to the more restrictive CO2 emissions controls within the EU. due to the emission quota system (EU ETS). In a spirit of fair competition between producers located on both sides of the EU's borders, the aim is to reduce this difference by a surcharge on products imported from countries that are less concerned with global warming. The objective is to avoid "carbon leaks", that is to say the relocation of the industries that emit the most CO2, the products of which come back to us with more carbon than if they were manufactured within the EU. These imported products alter our carbon footprint the moment they are consumed. As the High Council for the Climate underlined in its last report, if France's carbon footprint has globally decreased since 2005, imported emissions have continued to increase so that nearly half of emissions attributable to in France take place outside its borders. Before applying new regulatory screwdrivers to the European economic machine, it seems judicious to plug carbon leaks by tackling these imports.
From theory to practice
As is often the case in economics, solutions based on relatively simple reasoning turn out to be complicated to put into practice. The MAC is no exception to the rule. Economists have identified several pitfalls on the path to its application. The first is the measurement of the carbon footprint of a good, that is to say the greenhouse gas emissions generated by its production. This information is difficult to obtain on our soil, a fortiori outside our borders. The carbon footprint is generally estimated on the basis of questionable technical assumptions applied to more or less standardized production processes.
Second pitfall, the carbon footprint of the same good varies according to production technology, location, and production inputs. Steel does not emit the same amount of CO2 depending on whether it is produced by reducing iron ore with coke or by recycling scrap metal in an electric furnace. It is necessary to take into account the energy mix (the share of renewable energy sources versus fossils) of the country of origin, the possible environmental policies adopted to estimate the costs in order to assess the adjustment differential. This not only requires differentiating products according to these criteria but also ensuring their traceability along the value chain to our borders.
Third, plugging certain carbon leaks can accelerate the flow of emissions imported into other sectors. The Commission proposes to impose a CAM for only the obligated sectors of the EU ETS CO2 emission allowance system such as steel and cement. But this will have the effect of increasing the cost of these products when they are used by European producers without affecting their external competitors. American or Japanese car manufacturers will have access to a steel whose carbon footprint is not taxed unlike European manufacturers. Emissions from non-EU steel production could then re-cross the border in the form of vehicles, bodywork and auto parts, goods exempt from MAC because not subject to the EU ETS. In the end, the leaks plugged upstream in the value chain would move downstream.
A French MAC
In its response to the public consultation set up by the Commission, the French Government made proposals to make the MAC operational. As recommended by the Commission, this involves limiting ourselves to a few sectors involved in the EU ETS. The MAC would take the form of virtual emission allowances that companies would have to buy up to the imported carbon footprint at the market price of the EU ETS.
The measurement problem would be solved by taking an average of the European emissions of the sector of activity considered. Differentiation by mode of production and country of origin could be achieved by shifting the burden of proof to producers. These should demonstrate that their product has a lower carbon footprint or that they are subject to public policies at significant costs, or even comparable to those of the EU ETS, in their country of origin.
Joining the EU ETS has the advantage of reducing the risk of legal disputes at the WTO under the most-favored-nation clause since importers face the same costs as companies within the EU both for the price per tonne of CO2 and for the calculation of the carbon footprint of their product. Nevertheless, product differentiation opens the door to intense lobbying activity on the part of industry and EU trading partner countries.
A reduction in customs duties without distinction
The European Commission has the mandate to negotiate trade treaties whose main objective is to liberalize trade by reducing customs duties and non-tariff barriers. Agreements with Canada and the Mercosur zone (Argentina, Brazil, Paraguay, Uruguay) have been signed and are in the process of being ratified, others with Australia and New Zealand are still under negotiation. The unconditional reduction in customs duties provided for by these treaties contrasts with the MAC which, on the contrary, aims at a differentiated increase in charges applied to imports. Even if the trade treaties contain provisions on the climate (such as a reminder of the commitments made by signatory countries under the Paris Agreement), these do not condition trade liberalization.
Thus, the treaty with Mercosur provides for a gradual reduction in customs duties on 99,000 tonnes of carcass equivalent of bovine meat imported into Europe. In doing so, this treaty opens a new carbon leak since producing a kilo of beef emits nearly three times more greenhouse gases if it is produced in Latin America rather than in Europe according to FAO calculations. Replacing French beef with Brazilian beef on its plate increases France's carbon footprint through imported deforestation. According to the estimates of the Ambec report, the risk of deforestation induced by the liberalized beef tariff quota would have a significant impact on the carbon footprint of the treaty. Its contribution in terms of greenhouse gas emissions would be such that the climate cost of the Mercosur agreement would exceed the economic gains.
The Green Deal calls into question the consistency of the actions of the European Commission. While his right arm seeks to plug carbon leaks, his left arm opens others by eliminating tariffs in trade treaties. The Commission is launching a consultation on a mechanism that aims to erect tariff barriers based on the carbon footprint of imported products while continuing to negotiate trade liberalization with countries known for their disastrous carbon footprint, for example Australia. It makes you wonder if this consultation is not a smokescreen to hide the carbon footprint of trade treaties. If its conversion to the climate cause is sincere, the Commission should instead use trade agreements as a lever to plug carbon leaks. One solution, advocated by the Ambec report and a joint initiative of the Netherlands and France, consists in making the reduction in customs duties conditional on concrete commitments from the signatory countries aimed at reducing their greenhouse gas emissions.