Trade and Climate: A Looming Transatlantic Face-Off?

Peter S. Rashish

Vice President; Director, Geoeconomics Program

Peter S. Rashish, who counts over 30 years of experience counseling corporations, think tanks, foundations, and international organizations on transatlantic trade and economic strategy, is Vice President and Director of the Geoeconomics Program at AICGS. He also writes The Wider Atlantic blog.

Mr. Rashish has served as Vice President for Europe and Eurasia at the U.S. Chamber of Commerce, where he spearheaded the Chamber’s advocacy ahead of the launch of the Transatlantic Trade and Investment Partnership. Previously, Mr. Rashish was a Senior Advisor for Europe at McLarty Associates, Executive Vice President of the European Institute, and a staff member and consultant at the International Energy Agency, the World Bank, UNCTAD, the Atlantic Council, the Bertelsmann Foundation, and the German Marshall Fund.

Mr. Rashish has testified before the House Financial Services Subcommittee on International Monetary Policy and Trade and the House Foreign Affairs Subcommittee on Europe and Eurasia and has advised three U.S. presidential campaigns. He has been a featured speaker at the Munich Security Conference, the Aspen Ideas Festival, and the Salzburg Global Seminar and is a member of the Board of Directors of the Jean Monnet Institute in Paris and a Senior Advisor to the European Policy Centre in Brussels. His commentaries have been published in The New York Times, the Financial Times, The Wall Street Journal, Foreign Policy, and The National Interest, and he has appeared on PBS, CNBC, CNN, and NPR.

He earned a BA from Harvard College and an MPhil in international relations from Oxford University. He speaks French, German, Italian, and Spanish.

The idea that trade policies should be put to work on behalf of climate goals is gaining increasing currency. In a striking case of serendipity, the European Union and the U.S. Senate’s Democratic majority both chose July 14 to announce measures that, with a little meeting of minds, could signal the start of a major effort of transatlantic economic statecraft on behalf of a healthier planet.

Or of the next transatlantic trade skirmish.

The EU’s proposed “carbon border adjustment mechanism,” or CBAM, is by far the more wide-ranging and fully developed of the two initiatives. As part of its Green Deal, the European Commission aims by 2026 to impose a tax on imports of steel, aluminum, cement, fertilizers, and electricity that are not produced according to the same climate-friendly standards as the equivalent EU goods. The EU’s CBAM would be based on its emissions trading system (ETS) established in 2005. The ETS, which sets a price on carbon, will soon impose stricter requirements on the EU’s own producers and be extended to new sectors like transportation.

The Democrats’ plan, called a “polluter import fee,” is light on specifics. But a few days later, two Democratic Members of Congress, Senator Chris Coons and Representative Scott Peters, put forward a proposal for a “FAIR Transition and Competition Act of 2021” that includes greater detail than the July 14 announcement and uses language akin to the EU’s (“border carbon adjustment”). It may also provide insight into the contours of an eventual Biden administration approach to taxing carbon-intensive imports.

While the transatlantic mood music may be positive for the moment on trade and climate policies, there are risks of conflict.

For both Washington and Brussels, the goal is twofold: to protect the climate, and to prevent “carbon leakage”—the migration of U.S. or EU industries to third countries with lower standards. The success of the measures will not be gauged by how much tariff revenue they raise, or how many foreign goods are prevented from entering domestic markets, but rather by how soon they are phased out. Why? Because an early end to CBAMs would mean that U.S. and EU trading partners have established their own ambitious climate standards.

While the transatlantic mood music may be positive for the moment on trade and climate policies, there are also risks of conflict.

The EU proposal makes clear that “on account of the carbon price paid in a country of origin,” exporters will or will not have to pay the border adjustment tax. But the United States does not have a national carbon price and it is unlikely that the Congress will vote for one anytime soon. Instead, the Coons-Peters proposal relies on a combination of factors—the California and Northeast regional emissions trading systems, state renewable energy standards, and the compliance costs of the federal Clean Air Act—to approximate a national carbon price.

The EU needs to show some flexibility. As its CBAM proposal makes its way through the legislative process, it should find room for approaches to combat climate change that rely mainly on regulation, as in the United States, to be considered equivalent to those based on a carbon price.

It is in the interest of both the United States and the European Union to avoid more trade conflict. And longer term, only by aligning their approaches will the two sides be able to rally other countries to the ultimate prize—a reform of WTO rules so they strike a better balance between trade and climate goals.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American-German Institute.