An emerging flashpoint in America’s relationship with the European Union is the question of who gets to set climate-related standards — on energy efficiency, emissions disclosure and other issues. An early indicator of the brewing conflict came last week, when U.S. climate envoy John Kerry cautioned Europeans against adopting a carbon border-adjustment mechanism. Given its recent leadership in global standard-setting and its desire to show independence from the U.S., Europe may well go ahead either with or without the United States.
A carbon border-adjustment mechanism is effectively a tariff on the carbon content of imports, if those imports don’t meet the standards set within the importing area. Without such a mechanism, efforts to reduce emissions may fail because of carbon leakage. Let’s say, for example, you somehow reduce the emissions involved in producing steel, but that extra effort involves additional cost — what Bill Gates calls a “green premium.” Steel produced abroad with higher carbon content is then relatively cheaper. If that steel is imported, it displaces your steel, and your carbon savings. A border-adjustment mechanism can prevent such self-defeating substitutions.