Thread by @TomWlost

@SamuelMarcLowe @CER_EU Sam - a couple of quick comments. I'll return to this later, but for now. First, very good, timely and necessary piece ! Congratulations!

@SamuelMarcLowe @CER_EU Second, abt relocation of economic activity due to carbon leakage. This doesnt have to be actual moving of factories, or closing one factory in EU, opening another abroad. It's enough that EU producers of same good are less competitive than foreign producers of same good.

@SamuelMarcLowe @CER_EU If EU steel producers lose market share to steel imports, or EU fertilizer producers lose market share to fertilizer imports - that's also carbon leakage, because as a result of ETS, more carbon is emitted abroad, where there are no incentives to limit them.

@SamuelMarcLowe @CER_EU Third, I would completely leave agriculture & transport out of these discussions, as this will be polarizing, politically difficult and unnecessary: agriculture is not really subject to ETS right now. Neither is transport for that matter.

@SamuelMarcLowe @CER_EU It is true that we need to address these gaping holes in our carbon reduction efforts, but for now, domestic operators have no real cost here, so neither should imports.

@SamuelMarcLowe @CER_EU Four, UvdL talked abt going sector by sector. This is absolutely the right approach. They should take an easy sector that is susceptible to carbon leakage - high emissions and high trade intensity - chemicals or steel and start there. Fertilizers are ideal, as they are simple.

@SamuelMarcLowe @CER_EU Five, for the value of carbon tax, I think the system should be exactly the same as in the EU, so the issue is not whether the exporting producer emits less CO2 than an EU producer, but whether the exporter emits less CO2 than an EU benchmark (number of best EU installations).

@SamuelMarcLowe @CER_EU Six, this is where main problem w/ carbon tax is. EU ETS is based not on the product, but on factories. Its carbon-emitting factories that measure emissions & buy allowances. Allowances are therefore not linked to the product, but to the factory. With CBA, it will be in reverse.

@SamuelMarcLowe @CER_EU Assuming it is based at the border (bz there are different options considered), it will be a customs duty that has to be applied to the imported product. Products are traded globally. Depending on which product we're discussing, it can be even unknown who the producer is.

@SamuelMarcLowe @CER_EU The EU customs system requires information on origin, but this matters only if there is a customs duty and - if there are no tariff preferences claimed and the product is not subject to an antidumping duty - no one really verifies the real origin, as it is inconsequential.

@SamuelMarcLowe @CER_EU So a carbon border tax is going to change that, because we will need to know who the producer is and - if the producer has numerous installations - we will need to know which installation it was produced on. This brings me to the 7th point which you discuss.

@SamuelMarcLowe @CER_EU Seventh, we need to have a system with a default carbon import tax for imports coming from a country (based on some publicly available data for that country) that would be assessed automatically, unless the importer can prove his product was produced by a less-emitting producer.

@SamuelMarcLowe @CER_EU This raises two issues. One - what should the default rate be - for each country? based on what exactly? Two - how do we create a system for importers to prove they can pay less (or nothing).

@SamuelMarcLowe @CER_EU Eight, we need product-specific global database w/ default carbon emission values for all countries/regions. Sounds like a gargantuan effort, but in reality isn't. Most carbon-intensive industries already have this data, or a good approximation.Its part of competing on the market

@SamuelMarcLowe @CER_EU Nine, you're absolutely correct we need to create an ability for importers to claim a lower carbon tax, if they can prove lower emissions from their supplier. In my view, this is the absolutely main part of the system.

@SamuelMarcLowe @CER_EU That's bz without it, the system isnt going to be WTO compliant. But most importantly, bz it creates incentives for EU importers to make purchasing decisions based on carbon footprint ! It would ensure less emitting exporters are more competitive than more emitting exporters.

@SamuelMarcLowe @CER_EU In another words, it would be a victory for the ETS. Also, EU producers couldn't blame their uncompetitiveness on ETS anymore, which is another plus. For the European Commission, it almost exports our ETS system to foreign countries: another victory for the EC.

@SamuelMarcLowe @CER_EU It would ensure that foreign exporters, supplying the EU market, could essentially register with some ETS database (created by EC for this purpose, as now its the Member States that run the system), get audited, and reap rewards on the EU market from their carbon advantage.

@SamuelMarcLowe @CER_EU On your last point (multilateral system), of course US, China, Russia will fight this like hell. That's where the blockage in the WTO Appellate Body comes in handy ;)

@SamuelMarcLowe @CER_EU Either way, we're probably not going to see WTO return to what it was anymore. I think everyone agrees it needs a reform. Making space for green policies must be a part of that. We wont' see a resolution soon, but I agree with your conclusion. We need to press ahead! /END

@SamuelMarcLowe @CER_EU One more difficult point - carbon pricing. How exactly do we calculate the price of what importer has to pay for emissions? we discussed above how to calculate carbon emissions, but have not discussed the payment value or mechanisms.

@SamuelMarcLowe @CER_EU EU producers don't "pay" for carbon-emissions, the "pay" for allowances that are traded. Between payment and emission there is an intermediary instrument: allowance to emit. For carbon import tax system, do we ask the importers to also buy emission allowances?

@SamuelMarcLowe @CER_EU The answer is probably "no", bz number of allowances issued in the EU is limited. Until now, only EU producers needed them. If all of the sudden importers start buying the limited number of allowances, that would spike the price of allowances.

@SamuelMarcLowe @CER_EU They would become incredibly expensive. Unless we issue more allowances (how many?), it would dramatically increase the price of carbon. So either we need to skip this step, or issue dramatically more allowances.

@SamuelMarcLowe @CER_EU The second issue in relation to payment is the price. How exactly do we establish the price importers need to pay for carbon emissions related to the production of the imported product? It would be the amount of emissions multiplied by the price, but for which period ?

@SamuelMarcLowe @CER_EU EU producers can plan their allowance purchases. They can analyze the market and the price fluctuation and purchase allowances at the right moment. when "the price is right." All that matters is that at the end of the reference period, they have sufficient number of allowances.

@SamuelMarcLowe @CER_EU But if we skip the allowance system for imports, and just focus on cash payment, then importers would not have the opportunity to preplan their carbon purchases.They could not plan, they could not "buy" when the price is right.

@SamuelMarcLowe @CER_EU They would need to pay some price, probably an average price for allowances for some past period prior to the import. This would be objective but it would not be the same as for EU producers. So this could raise WTO concerns. /END2