EU's carbon border plan likely to use emissions trading, study says

BRUSSELS (Reuters) - The European Union’s carbon market is emerging as the tool most likely to be used to deliver its plan to impose carbon costs on imported goods, a study published on Wednesday said.

FILE PHOTO: European Union flags fly outside the European Commission headquarters in Brussels, Belgium, February 19, 2020. Picture taken February 19, 2020 REUTERS/Yves Herman/File Photo

The European Commission is due to propose a carbon border policy by the middle of 2021 aimed at shielding EU industries from imports from countries with lax climate policies.

EU states are also eyeing it as a source of cash for the bloc’s coronavirus recovery fund and next budget.

Rather than using a carbon tax, the EU appears more likely to widen its emissions trading system (ETS) to imports, non-profit research group the European Roundtable on Climate Change and Sustainable Transition (ERCST) said.

The ERCST said it had based its view on communications from the Commission as well as discussions with ETS participants and international trading partners.

“The ultimate goal is to have a pricing mechanism that recognises the value of carbon in the product,” ERCST Executive Director and study co-author Andrei Marcu said.

Expanding the ETS, which makes power plants and factories purchase permits to cover emissions, could require foreign firms selling goods into Europe to buy these at the border.

Still, designing the policy to comply with World Trade Organisation rules would be hard, ERCST said.

Other observers pointed to the advantages of using the ETS instead of a tax.

A carbon border tax would levy a fixed charge on imported goods. But for EU emitters, the price of permits in the EU ETS fluctuates every day.

This would make it difficult to create a fair system where domestic and foreign firms are exposed to the same EU carbon costs, said Simone Tagliapietra, research fellow at Brussels-based think tank Bruegel.

“There is a clear difficulty in linking a carbon border tax, which is fixed, with a fluctuating mechanism like the ETS,” he said.

Reporting by Kate Abnett; Editing by Alexander Smith and Elaine Hardcastle