Council on Geostrategy CBM0008

Written evidence submitted to by William Young, Associate Fellow, Environmental Security, Council on Geostrategy

Executive summary

This submission focuses on the geostrategic considerations of a UK strategy to address carbon leakage via a CBAM or other mechanism.  In particular it addresses the implications of potential unilateral approaches by the European Union or other entities and the data, certification and assurance gaps that have emerged as discussions have progressed.

It submits the argument that the UK’s, and the world’s, best interests are served by

• The pursuit of a staged multilateral approach “multilateral channelling”
• Drawing on the deep expertise and network of the existing national standards bodies and networks such as BSI and ISO and the multilateral negotiation capabilities of the OECD.

Council on Geostrategy

The Council on Geostrategy is dedicated to making the United Kingdom, as well as other free and open nations, more united, stronger and greener – for a more secure and prosperous future.  This submission is part of its work on environmental security.  It draws on research conducted for the May 2021 paper “When climate and trade combine: British Policy Options”[1] and further research since in particular adding flesh to the bones of the previously outlined “UK Policy Options”.

Situation: EU fears

The European Union (EU), which prides itself on its climate leadership, is grappling with how to decarbonise it’s trade exposed heavy industry (steel, aluminium, and to a lesser extent cement) without placing them in an uneconomic position in relation to countries that do not take action. The European Commission sees this as a ‘matter of survival’ of industry and by extension the success and failure of its climate plans.[2]

To counter this risk, the EU is examining proposals for a CBAM. France has long advocated for some form of border adjustment and experimented itself with solar power; however, it is only since the UK left the EU and Ursula von der Leyen succeeded to the presidency that CBAMs have moved from France’s preferred position to the EU’s stated plan as part of the much-feted ‘Green Deal’.[3]

Various designs are being examined with, in addition to a strong focus on compliance with World Trade Organisation (WTO) rules, potentially including the option for individual firms to prove their carbon intensity credentials and thus qualify for a reduced tariff.[4] However, although the EU’s unilateral approach has its advocates, it has put the wind up international trading partners who are concerned that this will be detrimental to their trading interests and/or potentially derail diplomatic efforts around the United Nations Climate Change Conference process.

Complications: international trading partners and generally accepted methodologies

The handling of two major and interrelated complications will determine whether the EU’s preferred policy is effective or counterproductive.

The first is that of alignment to the principles of equity and CBDR. CBDR is founded on the deeply rooted belief that economic development cannot happen without increased emissions and that lower-income countries should not be prevented by climate policies from achieving higher income status. A CBAM, by placing external constraints on trade in carbon-intensive goods, would undermine growth and place yet another burden on developing countries, undermining the principles of equity and CBDR. As revealed by the BASIC ministerial meetings in April 2021 this argument is already being made and it’s quite possible that this position will harden.

As a result, and depending on implementation, a CBAM could be a significant source of tension between the developed and the developing world, undermining efforts to secure enhanced Nationally Determined Contributions (NDCs) and increasing the conditions which countries like Brazil and India place on them.

The second complication is that of calculation and assessment. While everyone – broadly – understands the principle of a CBAM, and the EU and its advisors are reasonably confident that a WTO compliant plan can be developed, there is no agreement, and in fact no accepted framework, for actually calculating carbon intensity, or the embedded emissions in different industries.

Extensive progress has been made on establishing greenhouse gas emissions from point sources, needed to support policy mechanisms such as emissions trading schemes, and from countries needed to support the Nationally Determined Contribution process. However, the methodology for doing this at a country-industry-individual business level, sufficient to support customs declarations and levies, does not yet exist. It is not insurmountable; in fact various workable proposals have been made, even if they are complex.[5]

That it is complicated and that there is no generally accepted methodology means that even if the underlying fairness of a CBAM were to be accepted, there is likely to be significant dispute of any unilateral calculation and assessment. As we have seen with digital taxes and agriculture before it, if there is no agreement on underlying methodologies and economic interests are sufficiently misaligned then trade disputes are likely and there can be retaliatory tariffs in unrelated sectors.

What this all indicates is that whilst much thought has been put into how CBAMs could address carbon leakage and gain support in the countries that would institute them it is an untested assumption that a virtuous circle of increasing carbon adjustments would take place internationally.[6] Little thought has been put into how this virtuous circle can actually be made a reality and the high likelihood of increased trade tensions managed down.

Should the EU proceed unilaterally it is possible that the UK’s leadership on decarbonisation will position it well for equivalence with the EU. However, as we’ve seen with financial services when significant interests are at stake, as they would be again in this context, this is not a given and when coupled with the fact that other countries will be less well placed, increased tensions are likely.[7] As such the UK’s choices may wish to be informed by this and guided by pre-emptive action to manage these tensions.

UK policy options

There are a number of options the British Government could take on CBAMs, of which four stand out:

1. Do nothing: The arguments in favour of this approach are firstly: trade barriers are bad and the EU is shooting itself in the foot by both reducing competition and antagonising international partners with the CBAM proposal. Secondly, given the EU’s behaviour towards the UK since 2016, not standing in the way of this mistake might be sensible. The primary argument against this approach is that given EU institutions capabilities on trade and climate, it is possible that it could actually develop a credible and norm-setting position which would further concentrate power in EU institutions.
2. Form a blocking coalition: Side with and mobilise an international coalition founded in BASIC countries and Australia to exert pressure on the EU to drop or severely dilute its proposals. The model for this could be the effort that prevented international air travel from being included in the EU Emissions Trading Scheme (ETS). The primary argument against this approach is that: firstly, there is appetite in the UK itself to potentially implement measures to deal with carbon leakage, potentially a CBAM; secondly, the US and Canada are unlikely to join an outright blocking coalition, severely undermining its likelihood of success; and, thirdly, because one of the powerful aspects of a CBAM is its unilateral nature will make the EU likely resist all but a very concerted effort.
3. Copycat: Wait for the EU’s proposals to be released and then support and mirror their implementation plans. The primary argument against this approach is that it would reinforce the EU as a norm-setting institution and centre of gravity at the nexus of trade and climate, areas in which the EU already has significant reach and authority. Further concentrating power in EU institutions in this way would run counter to the British Government’s attempt to uphold national sovereignty, as specified in the Integrated Review.15 Secondly, this would only increase the likelihood of tensions with the developing world undermining not only COP26 diplomacy but also evolving bilateral relationships such as those between the UK and India.
4. Multilateral channelling: Channel the widespread developed world interest in pre-empting carbon leakage and enthusiasm for the CBAM concept into a multilateral process and institutions tasked with defining (a) the methodology underpinning the calculation of embedded emissions in a limited number of trade exposed primary industries such as steel manufacturing and principles by which countries would (b) place tariffs on imports from carbon intensive production.

Multilateral channelling is, I submit, the preferred option for the UK. To execute this strategy it would need to do engage the following institutions:

For the methodological aspect of this approach the national standards authorities such as the BSI in the UK or DIN in Germany would be the appropriate leads in the international process under the ISO umbrella.  This would enable a non-political, science based approach to product principles and product standards to be developed.  This would side step the highly politicised debates over whether a product is “green” or not by replacing politicised language with product codes and GHG emissions intensity metrics. The ISO process, effectively lead by BIS, DIN or others would enable the standard agreed to become *the* international standard, reducing the risk that incompatible standards undermine the free flow of goods. Furthermore the product and process certification and assurance regimes and agents – such as Lloyds Register and DNV GL - already exist and so no new state funded institutions would need to be created. Notably the ISO has recently committed to significantly advancing its activities in the climate space.[8]

For the principles around tariffs on imports the Organisation for Economic Cooperation and Development (OECD) would be best placed to conduct this work, based on their experience on global taxation and digital tax standards.  The new secretary general has begun to investigate.[9]

This approach is in line with that recommended by Board of Trade report on Green Trade.[10]

October 2021