What if there was an EU carbon border tax?

“We should have a European carbon tax on carbon, it is crucial.” French President Emmanuel Macron’s proposal made during his Sorbonne speech on Europe last week was unexpected, and not without consequences for sovereign investment risks and opportunities.

Emmanuel Macron and the French government have already set some ecological transition goals, including the symbolic ban on new oil and gas drilling and recent plans to end the sale of gasoline- and diesel-powered vehicles by 2040. With the website “Make Our Planet Great Again”, the French president positioned himself opposite to Donald Trump regarding climate change, just after the American president announced his decision to withdraw the U.S. from the Paris Agreement. Now, the return of the carbon border tax adjustment proposal underlines one of the potential evolutions that can be driven by the lack of international cooperation on climate change. It is worth noting, by the way, that some research works have suggested that the U.S. could be the most exposed country in terms of export losses, in the event of a border carbon adjustment in the European Union.

Carbon border tax adjustments have already been discussed for some time by various politicians, industrial players, economists, international organisations, as well as at the level of the European Union and in several other regions or countries. As Trump’s policies tend to move the U.S. towards notable border tax adjustments, carbon border tax adjustments may be a smart way for Europe to adapt to a new world characterized by a new type (less open) of globalization, while addressing climate and ecological challenges at the same time.

Indeed, Trump’s recent moves are not the only reason for carbon border tax adjustments to be the subject of renewed interest. In fact, France had already sought an agreement with the U.S. on a similar border tax in 2010. More recently in the U.S., in February 2017, a group of conservative thinkers featuring (among others) several former Secretaries of State or Secretaries of Treasury also argued strongly in favour of a carbon border tax: “border adjustments for the carbon content of both imports and exports would protect American competitiveness and punish free-riding by other nations, encouraging them to adopt carbon pricing of their own.”

The ecological transition requires, inter alia, putting a higher price on carbon to take its externalities into account. This is also clear in Macron’s recent speech in which he also supports a floor on carbon prices between €25 and €30 per tonne. The limitations of global cooperation on climate change make the case for even more intense regional cooperation, which can also imply protection measures. Lower environmental requirements in some regions of the world can make it challenging for European manufacturers to be competitive in an environment of ambitious ecological transition plans, unless some protection measures are put in place, such as a carbon border tax adjustment.

Be that as it may, the current context shows that, for various reasons, the idea of an unlimited globalization is no longer the major driver of international policies. We can also see this with the putting on hold of the TTIP free-trade deal between the EU and U.S., as well as with the development of sub-regional tensions within the EU (e.g. Brexit, Catalonia…). For better or worse, global initiatives appear for the moment to be weakening while the role of regional and national entities could strengthen.

When it comes to carbon- and climate-related risks, this tends to be negative for international negotiations, as illustrated by the weakening of the Paris agreement by the U.S. Presidency. However, this also means that strengthened regional initiatives are becoming more probable and this is something to further integrate in the analysis of investments risks and opportunities. If a carbon border tax adjustment was implemented in the EU, this would of course have significant impacts. This is precisely one of the reasons why, when Beyond Ratings conducts sovereign carbon footprints for various investors worldwide, we systematically integrate imported greenhouse gases (GHG) emissions (i.e. GHG that have been emitted to produce the goods and services that are imported).

On this basis, our data reveal that imported emissions account for about 50% of the total national emissions (territorial and imported emissions) of France or the UK. This is slightly less in Italy and Germany but even more in Sweden or Switzerland. Many exporting countries can thus be exposed in the event of carbon border tax adjustments, and issues at stake for European imports and domestic manufacturing activities are also very significant. The stakes are also high for the public finances of the countries that could benefit from a regional carbon border tax adjustment, as proposed by France. Some sectors are also more exposed than others, depending on each country, as evidenced by the detail of sector-by-sector and country-by-country flows. Some examples of exposure levels are found below with details on:

  • Ratios of exported GHG divided by GDP for several large non-European exporting countries (taking into account GHG emissions specific to each exporting country). The use of GDP as the denominator offers a view that considers both the carbon intensity of exports and the size of exports in the economy.
  • The average carbon intensity of imports for EU-28 countries (taking into account the full value chain of imports).

Exports GHG/GDP (tCO2e/USD m)


Sources: Beyond Ratings, Eora, WRI

Average carbon intensity of imports for EU-28 countries (kg of CO2 per USD)

Sources: Beyond Ratings, Eora, UN Comtrade

This is where a carbon border tax and sovereign carbon footprints (including imported GHG) relate to risk analysis and investment management. This may not be the same thing as directly looking at usual high-frequency and macroeconomic indicators but, in that sense, it can also allow to better identify high-magnitude non-linear events (of low frequency) that can sometimes have much higher impacts than small evolutions of key economic variables, even if such shocks remain uncertain until they happen, and occur by definition less often. At least it makes clearer the link between carbon exposure levels and financial materiality.


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