Imagine if your electric bill was calculated by counting the number of TVs, refrigerators and AC units in your house, rather than actual power usage. Unfair? Inaccurate? Outrageous? All the above – we all know electricity consumption varies based on time of day, efficiencies, home activity, and the many things some of us do to lower our usage.
It may seem like an outlandish scenario, but it’s not far off from the Europeans enacting a carbon border tariff program and making decisions about US product carbon content without the U.S. developing our own, measurement-based math. If we don’t, American manufacturers could be unfairly penalized with higher taxes through export tariffs as the E.U. finalizes their approach.
These carbon adjustment policies – which levy taxes based on the estimated tons of GHG emissions associated with imported goods (often described as its carbon or emissions content) – are designed to address the issue of carbon leakage, where domestic industries may face a competitive disadvantage due to imports that are produced more cheaply because of lower environmental standards in other countries.
Ultimately, this carbon border tax sheds light on the importance of the “Measurement Economy,” an emerging economic paradigm where the measurement and verification of a product’s environmental impact, particularly greenhouse gas emissions, becomes a crucial factor in trade and commerce.
In this new economy, countries and businesses are increasingly recognizing the importance of measuring, reporting, and reducing their carbon footprints to mitigate climate change but also compete for new customers. By producing goods with lower carbon intensity, companies can offer a better product at a lower cost, thus gaining a competitive advantage. This isn’t politics, it’s pure economics.
By applying a carbon price at the border, the CBAM would level the playing field by discouraging imports of carbon-intensive products and incentivizing the consumption of low-carbon alternatives.
If the EU adopts a CBAM, this could be a forcing event that will drive significant changes in the global trade landscape. It provides an economic incentive for countries to improve their environmental standards and reduce emissions, as failure to do so could result in trade penalties and a loss of competitiveness in the global market. Forthcoming U.S. policy like the Providing Reliable, Objective, Verifiable Emission Intensity and Transparency Act or PROVE IT Act can help get the US ready with our own math.
Of course, waiting for the market to mature before beginning to measure emissions is a risky strategy. While there may be an estimate of carbon intensity, it is only through actual measurement, not estimation, that accurate data is obtained. Waiting until the last minute to start measuring emissions can put companies and countries at a disadvantage.
The Measurement Economy, represented by policies like the CBAM and the PROVE IT Act, aims to create a framework where carbon emissions are accounted for in international trade, encouraging the production and consumption of cleaner and more sustainable products. It seeks to align economic activities with environmental goals and drive the transition to a greener, more climate-resilient future.
Empirical data is the only way to drive truly effective climate actions. Companies and countries that compete to produce low-carbon intensity products stand to gain economic advantages. Waiting for the market to mature and underestimating the significance of measurement can be detrimental.
We must embrace measurement practices to stay competitive in the evolving global landscape.
Mr. Romer is co-founder and CEO of Project Canary, a measurement, analysis and environmental risk assessment firm.