It appears that the key
conflict will be between those who will argue that net zero
commitments over various timeframes will be sufficient to limit
global warming to acceptable levels and those who will argue
for them to be supplemented by Carbon Border Taxes
(CBTs). The European Union is strongly in favour of
CBTs with the UK largely supportive but concerned that the EU
might in practice use them as post-Brexit protection. The Biden
administration also seems to be in favour as are US trade
unions. Expect pushback especially from China and India. The EU
is estimating revenues of €5-14 billion per annum from these
taxes which, critically, will be received by the cash-strapped
European Commission.
The idea of a carbon border
tax is to prevent environmental regulatory arbitrage by taxing
the carbon content in imports. The current EU
proposal, for example, aims to impose a tax on goods imported
into the EU by 2023 that would reflect the amount of carbon
dioxide (CO2) emissions attributed to their production. Part of
the reasoning behind this is that if carbon pricing
becomes more widespread in the advanced economies, their
industries in the absence of CBTs risk being undercut by
imports from countries with more lax carbon pricing or
regulation.
To get some idea of who might be
negatively affected by this we have conducted an analysis based
on data from Carbon Footprint.1 If this the CBT is going to be
based on the carbon intensity of electricity generation, there
will be some surprising winners and losers. China’s
intensity is only 0.55 tonnes of CO2 per MWh (although Hong
Kong is ~0.75), only a little bit higher than that of USA
(0.45), whereas Australia’s is 0.79. The respective figure for
the UK is 0.25 (thought this is slightly out-of-date, it is now
nearer 0.2), for France it’s 0.04, for Germany 0.38 and for
India 0.71. This illustrates why the USA has traditionally been
less in favour of CBTs, while France is an enthusiastic
proponent.
If carbon border taxes are
introduced, their level will be crucial. The UK has had a
carbon price floor of £18 ($25) /tCO2 for a while. In Europe,
the emissions trading scheme’s price was €5 to €8 for most of
2012 to 2018, with this rising to €25 during 2019. Since
January 2021, the price has further risen to €40 and above. But
the international recommendations for CBTs are much higher
– the World Bank’s recommendations for the carbon
shadow prices (used for economic analyses) currently range from
$40 to $80, and are set approximately to double by
2050.
The arguments against CBTs are that
they would require a huge bureaucracy which would be subject to
pressure to grant special favours (currently many of the most
carbon intensive businesses in the EU have been granted free
carbon permits) and that those countries likely to lose out
would be tempted to retaliate. There is a risk that the
levies could degenerate into a sophisticated form of
protectionism. There are also lingering doubts as to
whether they are legal under WTO rules but if enough countries
were in support these rules could be changed in any
case.
Should CBTs be introduced in the
coming years, they look likely to transform the shape of world
trade, especially when combined with reducing labour contents
in production. The result would be diminishing exports
from low labour cost and deregulated countries in the East. And
likely countervailing action will diminish Western exports to
the East.
A study for Greenpeace in Korea2 has
estimated that CBTs for the EU will push up the price of steel
by ‘over 10%’, petrochemicals by 5% (ethylene by 40%),
electronic goods, machinery and vehicles by 1-5%. Cars are
expected to be $200 more expensive, though this is small
compared with the potential impact of phasing out fossil fuels.
Some of these costs should in theory be offset by using the
revenues to pay for other things.
1:
COUNTRY
SPECIFIC ELECTRICITY GRID GREENHOUSE GAS EMISSION FACTORS,
Carbon Footprint, Last Updated: September 2020
2: https://www.greenpeace.org/eastasia/press/6291/greenpeace-report-finds-carbon-border-tax-from-major-export-countries-likely-to-incur-a-levy-of-us530-million-per-year
