Topic: Carbon Leakage

As the European Union and the United States work toward stronger climate policies, their two divergent approaches are creating tension. The EU has opted for a mix of rewards and penalties to incentivize green industries while also taxing carbon emissions from domestic industries - a “carrots and sticks” approach. On the other hand, the US is only offering rewards because Congress can't assemble a sufficient majority to agree on taxing carbon emissions from its industries; in other words, a carrots-only approach.

These contrasting approaches to climate policy have agitated trade discussions between the US and Europe, as shown by the recent passage of the $369 billion Inflation Reduction Act in the US, which European leaders worry might make their trade position weaker.

But another policy is now rising to the forefront as a source of trade tension: Europe's Carbon Border Adjustment Mechanism (or CBAM), which will impose tariffs on goods imported to Europe based on their embedded carbon emissions. The CBAM works to prevent "carbon leakage" by ensuring that European producers who pay carbon taxes won't be disadvantaged compared to others who don't.

In this conversation, we are joined by Noah Kaufman, an economist and research scholar at SIPA’s Center on Global Energy Policy at Columbia University who served in the White House under both President Biden and President Obama, to discuss the challenges of accounting for the embedded carbon emissions in various goods, as well as how the EU and the US can find common ground and harmonize their climate policies.