Comment: With U.S. back at climate table, who sets standards?

By Peter R. Orszag / Bloomberg Opinion

An emerging flashpoint in America’s relationship with the European Union is the question of who gets to set climate-related standards: on energy efficiency, emissions disclosure and other issues. An early indicator of the brewing conflict came last week, when U.S. climate envoy John Kerry cautioned Europeans against adopting a carbon border-adjustment mechanism. Given its recent leadership in global standard-setting and its desire to show independence from the U.S., Europe may well go ahead either with or without the United States.

A carbon border-adjustment mechanism is effectively a tariff on the carbon content of imports, if those imports don’t meet the standards set within the importing area. Without such a mechanism, efforts to reduce emissions may fail because of carbon leakage. Let’s say, for example, you somehow reduce the emissions involved in producing steel, but that extra effort involves additional cost; what Bill Gates calls a “green premium.” Steel produced abroad with higher carbon content is then relatively cheaper. If that steel is imported, it displaces your steel, and your carbon savings. A border-adjustment mechanism can prevent such self-defeating substitutions.

At the same time, it can encourage companies in other jurisdictions to abide by your standards.

Such a border-adjustment mechanism in Europe would be of particular concern for the U.S. As a recent analysis from Bruegel, a European think tank, notes, the border adjustment issue “generates the most concern in the United States. A carbon tariff could dramatically affect U.S. exports of coal, natural gas and many manufactured products.” The European Green Deal could also set auto emissions standards that are more stringent than what’s planned in the U.S., and European agricultural standards may also turn out to be stricter. To protect its own rules in these areas, Europe could simply exclude U.S. imports, or it could extend the reach of the border adjustment beyond coal and natural gas.

The debate over border adjustment thus quickly moves to the question of who gets to set the standards. And recent history suggests the EU, despite ongoing concerns about how well it functions, may play an outsized role. In what has been called the “Brussels Effect,” the EU has been playing a more dominant role than commonly appreciated in setting a variety of global standards. Anu Bradford, a law professor at Columbia University, has documented how the EU has shaped the international business environment on data privacy, online hate speech, and consumer health and safety. It does so not by imposing standards directly, but by having companies outside the EU adopt the rules voluntarily in order to succeed in EU markets. Global companies apply the practices across the board; so EU standards effectively become global ones.

Given the importance Europe attaches to its Green Deal, the Brussels Effect on climate change is a force to be reckoned with. And without a border-adjustment mechanism, the European Green Deal may turn out to be futile. So it’s hard to see how the Europeans could back down on the issue.

The last time a similar issue arose — in 2012, when the EU set limits on airline emissions — Europe did back down. The EU intended to impose a border adjustment on all international flights, but decided not to after other countries, including the U.S., objected intensely.

But there’s reason to suspect the Europeans might act more forcefully now. In the intervening years, the relationship between Europe and the U.S. has changed. The election of President Biden has helped to smooth some of the tensions, but questions remain in Europe about the future of the alliance and how much it should rely on the U.S. Many Europeans are also annoyed by the strong U.S. resistance to the Nord Stream 2 pipeline from Russia to Germany, considering it to be undue interference in their decisions. The result is an EU more likely than before to go its own way, even under U.S. pressure.

The most promising path through this thicket would be for the EU and the U.S. to impose a joint border-adjustment mechanism outside their borders but not within them. This is what the Bruegel report recommends: “The EU should take the initiative and propose to the incoming U.S. president the creation of a climate club whose members would apply similar common carbon border adjustment measures. The club would function as an open partnership, and membership would be subject to criteria on the level and implementation of emissions reductions … a joint EU-US initiative, possibly in partnership with developing countries, would be a major boost to climate action.” However, this assumes an extraordinary, potentially impossible degree of cooperation and coordination between the U.S. and Europe.

A border-adjustment mechanism is not easy to implement technically, so there are many questions that would need to be answered before it could take effect. But my bet is that Europe will adopt one, whether or not the U.S. joins in.

Peter R. Orszag is a Bloomberg Opinion columnist. He is the chief executive officer of financial advisory at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.