The world’s three largest greenhouse gas (GHG) emitters – China, the United States, and the European Union – are tackling climate change in their own ways, implying that convergence on climate strategies is not in sight. Differing approaches to emissions reduction, carbon border adjustments, and nuclear power spell geopolitical challenges.
Reduction of GHG emissions
China’s carbon reduction plan focuses on reducing carbon intensity, a measure of how much carbon is emitted to achieve one percent of economic growth, instead of capping the absolute level of carbon emissions. As part of its initiative to reach carbon peaking before 2030 and carbon neutrality by 2060, China launched its long-waited national carbon trading market last July. The market initially covers 2,225 power plants. Other high-carbon industries, such as iron and steel, may be included before 2025. Free allowances are now granted to firms covered by the scheme, and China has not yet promised to phase out the allowances over time.
The design differs from the EU Emissions Trading System (ETS), which operates under a ‘cap and trade’ scheme. The cap on total carbon emissions declines over time so that total emissions must fall. EU critics are already pointing at the absence of a Chinese carbon cap. Furthermore, China’s emission reduction target, namely carbon neutrality by 2060, comes a decade later than the timeline committed by the US and the EU. Going forward, countries with higher environmental standards will demand China to cap its absolute GHG emissions and implement more ambitious climate policies.
Meanwhile, despite its rhetorical commitment to carbon neutrality by 2050, and legislative talk of expenditures to promote a green economy, the United States has neither a carbon emissions market nor hard caps on individual sectors, such as electricity generation, steel production, and motor vehicles. Some states, such as California, are enacting their own measures, but these are far from national mandates.
Carbon Border Adjustment Mechanisms
Compared with the EU and China, therefore, the US does not have a domestic carbon pricing scheme either through a carbon tax or an ETS. But both the EU and the US have proposed carbon border adjustment mechanisms (CBAM) on a number of carbon-intensive industries as part of their green initiatives. The main purpose of border adjustment is to prevent “carbon leakage”, the risk (exaggerated in popular discourse) that companies will move carbon-intensive production abroad to take advantage of less ambitious environmental standards. Or that domestic products will be replaced by carbon-intensive imports, thereby defeating the effort to reduce global emissions while harming the domestic industry. For its part, China does not plan border measures.
Building on its mature ETS, the European Union proposed to collect carbon border taxes from EU importers. The import fee will correspond to the carbon price that would have been paid had the goods been produced in compliance with the EU’s ETS. Free allowances for covered products under the ETS will gradually phase out from 2026. Importers have a transition period between 2023 and 2025 when they only need to report emissions embedded in their imported products. Border fees have to be paid starting January 2026.
Both the EU and US CBAM systems are controversial: trading partners see gigantic loopholes for disguised protection. Australia and China have both voiced objections. Compatibility of the systems with WTO rules is vigorously contested. Importantly, the EU and the US CBAM systems both grant exemptions to qualified trading partners. These exemptions could violate the WTO’s non-discrimination rule. Furthermore, Article III of WTO’s General Agreement on Tariffs and Trade mandates that imported goods should not be subject to charges in excess of those applied to like domestic products. The EU free allowances on CBAM products before they completely phase out and the absence of a US domestic carbon tax both raise national treatment questions.
If the CBAM systems are implemented, trade disputes will be brought to the WTO, adding fuel to the already sour relationship between China and the West. As well, other countries, starting with Australia, will join as complainants. Meanwhile, Dutch Member of the European Parliament Mohammed Chahim commented that no exemptions should be granted to imports based on implicit carbon pricing or other GHG reduction policies. If his view is accepted, that will disqualify the US from receiving EU exemptions, potentially another source of friction in EU-US trade relations.
Revival of nuclear power
Nuclear energy generates about 20% of America’s overall electricity and more than half of US zero-emissions energy. Nevertheless, nuclear power has been demonized by environmentalists, citing (and hugely exaggerating) the risk of catastrophic accidents like Three Mile Island, Chernobyl, and Fukushima. The current energy crisis, however, has persuaded some governments to reconsider the constructive role that nuclear power can play in energy security and decarbonization.
In an interview at COP26 in Glasgow last November, US Secretary of Energy Jennifer Granholm said that the Biden administration is very “bullish on advanced nuclear reactors” and is very supportive of relevant R&D. In fact, last June the Department of Energy announced $60 million funding support for nuclear energy research at US universities. Also at COP26, President Macron announced that France would relaunch the construction of nuclear reactors to combat climate change. More recently in February 2022, Macron announced that France would build up to 14 new nuclear reactors as part of a renaissance for the French nuclear industry. In the Action Plan for Carbon Dioxide Peaking Before 2030, issued by China’s cabinet State Council in October 2021, Beijing listed “actively developing nuclear power through a safe and orderly approach” as a key strategy to achieve green and low-carbon energy transition. Rumors suggest that China meanwhile is planning at least 150 new reactors in the next 15 years. And the European Commission has proposed (over German objections) to label some nuclear energy investments as “green” and sustainable.
Despite the fraught connection between nuclear power and nuclear weapons, it appears that fears of climate change are proving stronger than fears of nuclear accidents. This may be the most important geopolitical outcome of the “green transition.”
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