GT3 - A European Border Carbon Adjustment Proposal

This paper reviews the technical and political difficulties behind IMF Managing Director Kristalina Georgieva’s position at the World Economic Forum in Davos on 23 January 2020, who publicly expressed concerns about the implementation of a proposed Carbon Adjustment Mechanism. With the support of the European Climate Foundation, this paper – the third in the series Greening EU trade policy – also takes stock of past attempts and reviews the legal and political criteria that need to be met for the adjustment mechanism to effectively meet its objectives.

While recalling that an increase in the domestic price per tonne of carbon and the abolition of the free allocation system are necessary prerequisites for any corrective measures of a commercial nature, this note concludes that the European Commission should work towards a progressive mechanism parallel and equivalent to the EU ETS. This mechanism should initially target electricity and cement and then be extended to additional products subject to carbon pricing in the EU, subsequently paving the way for carbon pricing system convergences among trading partners.