How EU Trade Policy Can Enhance Climate Action: Options to Boost Low-Carbon Investment and Address Carbon Leakage

Abstract

In her Political Guidelines, Commission President-elect Ursula von der Leyen sets climate neutrality as one of the central objectives of a proposed European Green Deal. EU member states are now discussing whether to formally agree an objective for climate neutrality in 2050. Some have already set deadlines – Finland as early as 2035. This has triggered reflection on the adequate policy mix, notably with a view to making a business case for low-carbon innovation and investment while addressing carbon leakage. The Commission President-elect thinks that this will require a carbon border tax.

To address the strategic need for a robust EU framework for low-carbon investment, we recommend that the European Commission i) investigates the economic, legal, and administrative viability and implementation timeline of carbon price adjustments at the border, ii) examines the possibility to extend the EU ETS to include consumption of carbon intensive materials and the potential of product standards to achieve the same aim. All these approaches have different advantages and shortcomings in terms of political acceptability, effectiveness and implications for the world trade system. To support partner countries in advancing climate action, both bilateral and multilateral measures should be prepared.

Keywords: climate neutrality, EU ETS, EU framework for low-carbon investment, European Green Deal, carbon border tax