Climate, Finance and Trade – Is Climate Policy the next trade battleground? If President Macron wins the argument, yes.

The debate on how to finance Europe’s transition to a low carbon economy has seen a significant political crescendo over the last months. The most important talks on new spending and financing options are taking place within the context of the next Multi-Financial Framework, where Member States are discussing whether and how to better align those options to help the EU achieve its policy priorities, among which climate and environment targets.

Some Member States have already taken action at national level (UK, Netherlands, Sweden) or are considering to do so (Italy) by introducing taxation to support public policies towards sustainability goals.

Among strong resistance in the Council, President Emmanuel Macron has pushed the debate forward as he has repeatedly called for a European carbon price floor to boost revenues from the auctioning of emission permits under the EU Emissions Trading Scheme, with a view to drive investments into low-carbon technologies.

Macron is relaunching a proposal long defended by France, which for its part has set a minimum price of carbon of €44 a tonne CO2 on its domestic market and which will be effective from 2022 (ironically, this has already been enacted unilaterally in the UK via the Carbon Price Floor, where over the past 3 years it has effectively killed coal in the power generation system).

This would seem the best political choice given the Paris Agreement targets. It would allow a faster decarbonisation of the economy by driving investments in low carbon technologies over the long-term, while providing public resources to fuel further technology research and manage all the social aspects of the transition, including upgrading skills and job reconversion.

However, two challenges stand in between, one being the consequence of the other. What if –as is likely – under political and social pressure, the signatories to the Agreement do not follow Europe on the same track and do not choose to impose a carbon price to their economy? European companies would be penalized by an unfair trade level-playing field, particularly disadvantageous for those industries which are not enough protected by carbon leakage measures.

President Macron views the disruptive impact of such a policy decision on the European job market and on the competitiveness of European industries as a real problem. That’s why he is advocating for a high carbon price floor to go hand in hand with a border tariff (or border adjustment mechanism) applied to countries which do not have a carbon price policy.

The border tariff is also specifically mentioned in the new EU ETS Directive as an option to be considered to better protect sectors and sub-sectors exposed at a risk of carbon leakage.

The proposal is not new, it has been discussed by the EU institutions several times over the past reforms of the Emissions Trading Scheme since 2009, but was finally dropped by some key Member States backed-up by industry. The main argument being that the border tariff would be seen as a protectionist measure and trigger WTO disputes, potentially leading to negative impacts for European economies largely dependent on external trade flows.

With a trade war looming after Trump’s decision to apply tariffs to imports of aluminium and steel (following a specific bilateral negotiation, the EU has been temporarily exempted until 1 May), together with his decision to withdraw from or renegotiate the Paris Agreement, some in Europe are thinking about fallback solutions to defend the economy. Linking trade and climate policies seems a possible way forward. Of course, this could be the next stage in a spiral of protectionism that will damage all parties. As ever – the arguments are finely balanced.

Macron said he will relaunch the idea at the June European Council. Stay tuned.