US-EU relations over climate change mitigation have historically oscillated between cooperation and competition. The current debate around the European Union’s proposal of the Carbon Border Adjustment Mechanism (CBAM) represents the latest example of this dynamic. Although the CBAM has its flaws, the United States should embrace this EU initiative, as it will serve US interest and the global endeavor to effectively tackle climate change.
The US and the EU have often been at the forefront of efforts to push for global climate change mitigation. However, the Trump Administration seriously challenged this relationship, be it by withdrawing from the Paris Climate Accords and lifting various domestic regulations tackling carbon emissions. When President Biden assumed office, many EU representatives breathed a sigh of relief, perceiving a room of opportunity for renewed cooperation on climate change. However, while the Biden Administration does indeed aim to tackle climate change, this has not brought about a complete convergence of views between the transatlantic partners. The US’ current stance towards the CBAM exemplifies this.
In July 2021, the European Commission proposed the CBAM as part of its Fit for 55 package, which aims to reduce, by 2030, the carbon emissions by 55% compared to 1990 levels, on the path to becoming the first carbon-neutral continent by 2050. The CBAM would complement the EU-internal Emissions Trading System (ETS), a cap-and-trade system enforced since 2005 in which its most carbon-intensive industries need to buy carbon allowances in exchange for emitting carbon. The CBAM is supposed to prevent “carbon leakage”: as the ETS places an increasing burden on European industries, putting them at a comparative disadvantage, the EU worries that either European firms might relocate to escape these regulations or more competitive, less carbon-efficient products might enter the single market. According to the Commission’s CBAM proposal, products can enter the European single market if non-EU importers surrender carbon allowances corresponding to their products’ carbon footprint. By requiring foreign industries to pay for importing excessive emissions, the EU aims to re-establish a level-playing field for its domestic industries on the international market. The CBAM will initially only apply to six productsconsidered most vulnerable to carbon leakage: aluminum, steel, iron, electricity, fertilizers, and cement.
Competition and Cooperation
The US’ response to the CBAM proposal has been lukewarm at best. Even before the official proposal by the European Commission, the US challenged the CBAM at the World Trade Organization (WTO) in 2020, arguing that the CBAM violates WTO law and is akin to imposing trade barriers. During his visit to the European Commission before COP26 in March 2021, John Kerry, as the Presidential Climate Envoy, warned that the CBAM should only be a “last resort” as it could “detract from efforts to get more countries to elevate their climate ambitions at the United Nations climate summit”. This attempt to speak on behalf of other economies illustrates the US’ goal to regain leadership on climate change mitigation. Similarly, by questioning its legality, the US directly challenges the CBAM and communicates opposition to its implementation. The US’ reticence to the CBAM is somewhat bipartisan as shown by a letter by Republican Senators addressed to Biden, urging him to dissuade the EU from implementing the CBAM.
Notwithstanding, both sides continue to cooperate on the matter. The European Parliament’s (EP) rapporteur on the CBAM, Mohammed Chahim, cited consistent productive meetings between Members of the EP, US Congress, and the Biden Administration. According to him, increasing numbers of both Republicans and Democrats are in favor of a carbon border adjustment mechanism for the US, knowing that its less carbon-intensive industries can profit from it. If a carbon adjustment mechanism for the US were on the table, its reservations towards the EU’s CBAM would fade.
Domestic Divides and Common Grounds
The idea of a carbon border adjustment mechanism has indeed gained support in US Congress. Recently, Democrats have proposed two different US carbon border adjustment mechanisms with the Clean Competition Act and the FAIR Transition and Competition Act, with the latter especially spurring bipartisan discussions. However, the motivations of Republicans and Democrats for a US carbon border adjustment differ considerably. While Republicans envision a US carbon adjustment mechanism as an America-First policy advancing the US’ geopolitical and economic interests, Democrats acknowledge that the mechanism would realistically require a domestic carbon pricing mechanism coupled with the proposed policy in order to be fair. Republicans have consistently opposed domestic carbon pricing, wary of the additional burden on domestic industries, while citing sufficiently stringent regulations already in place. Moreover, Democrats compromise on effective climate change mitigation in favor of more beneficial trade conditions: their proposed US carbon adjustment mechanism would exempt countries that do not levy US firms, thereby incentivizing the exemption of US firms rather than more ambitious climate regulations. When also considering that US representatives frequently asked whether the US could be exempted from the CBAM, one can presume that the rationale of a large Congressional majority behind the US’ opposition to the CBAM is primarily to ensure a favorable American trade and business environment, with effective climate change mitigation as a secondary goal.
Is the CBAM in US Interest?
Regarding the US’ business and trade interests, the CBAM would likely only have a limited impact on the US in the short term. Under the current proposal, only $1.1 billion of US exports to the EU would be affected, a small portion of the total $271.4 billion of all US exported goods into the EU. US industries are more carbon-efficient than other foreign counterparts, meaning they would be charged less and would obtain greater access to the European single market. However, in the long term, the reach of the CBAM will likely be expanded, which would increase the burden on US industries.
That notwithstanding, the US should support the CBAM as an effective measure against climate change. Climate change threatens the US’ immediate short- and long-term interest. The Intergovernmental Panel on Climate Change (IPCC) report declares with moderate certainty that if the global temperature increases to 1.5° Celsius, some of the US’ freshwater resources, its food and nutritional security, and its well-being, livelihoods, and economic activities would be at risk. Under current policies, the world would head up by roughly 3° Celsius, so double the temperature increase under which the US would already be impacted.
If the US wants to counteract this negative trend, its political landscape and strategy will have to change. Climate change mitigation has increasingly become a partisan issue which makes much needed cooperation on climate policies less likely to happen. In 2020, only 31% of Republican voters believed climate change was a major threat to the US, compared to 88% of Democrats. Overall, the US has a history of favoring a “command and control” approach, meaning utilizing investments and regulatory programs to govern emissions. This approach has arguably resulted in the US never meeting its climate pledges. As climate change threatens its very lifestyle and prosperity, the US depends on effective mitigation of climate change, both domestically and internationally.
Conclusion: Advantages Outweigh Disadvantages
Admittedly, the CBAM faces valid criticisms. Scholars still disagree on the CBAM’s WTO-law compatibility. Furthermore, the CBAM is believed to violate the Paris Agreement’s principle of “Common but Differentiated Responsibilities” due to the expected disproportionate impact on developing countries, as a result of their industries’ higher carbon intensity, their lack of advanced technologies, and required statistical and monitoring capabilities. Moreover, as the CBAM is supposed to subtract the monetization of the importers’ domestic regulations, in whatever form, ensuring all importers’ equal treatment will be challenging. But, as the CBAM still undergoes the EU legislative process, adjustments can still be made.
Crucially, the literature argues that the CBAM would be beneficial in effectively reducing global carbon emissions. Likely to expand and mature over time, the CBAM could stimulate more ambitious policies around the globe, given importers’ preference to access the European single market. Specifically, the CBAM could serve the Biden Administration as a justification to consider similar policies domestically. The US should support the CBAM and the EU’s daring approach by keeping up the dialogue and learning from one another’s experiences, for the EU’s goal is to cut emissions which serves US interest. If the US truly wants to be a leader on climate change mitigation, it should do so by making achievements of its own, and not letting those of its competitor/cooperator fail.