Analysis: Europe faces a skeptical globe with the carbon tax

By on July 5, 2021 0


Birds fly over a closed steel plant where the chimneys of another working factory are seen in the background, in Tangshan, Hebei province, China, February 27, 2016. REUTERS / Kim Kyung-Hoon // File Photo

  • EU to unveil world’s first border tax
  • Brussels says it will be WTO compatible
  • But the implementation could be tricky

BRUSSELS, July 5 (Reuters) – The European Union faces an uphill battle to convince its trading partners that the world’s first tax on carbon imports is fair, achievable, and integral to the green revolution attempt of the bloc, as opposed to a protectionist tool.

The EU is due to unveil a set of laws on July 14 to reduce net greenhouse gas emissions by 55% by 2030 from 1990 levels.

As part of the plan, he will describe what he calls a Carbon Border Adjustment Mechanism (CBAM), designed to reduce emissions by creating financial incentives for greener production and discouraging ‘carbon leakage’, such as transferring operations to less expensive countries. emission restrictions are known.

The bloc will want to avoid the kind of fallout it suffered after a separate environmental ruling in 2018, when it excluded palm oil from its list of sustainable biofuels and sparked legal challenges from Indonesia and the United States. Malaysia before the World Trade Organization.

Prior to that, an EU attempt to charge foreign airlines for carbon emitted on flights to and from Europe threatened to spark a trade war after the US aviation industry met with strong political opposition and that China has said it will suspend aircraft orders. The European Union was forced to announce in 2012 that it would suspend the law.

Bernd Lange, chairman of the European Parliament’s trade committee, said the CBAM could prove to be the source of trade disputes – especially with the United States, if Brussels cannot find an agreement with Washington.

“We must seek an agreement so that this CBAM does not end up in a case before the WTO. It is a big task for the next few months,” he said in a webinar.

The Commission said its plan would be WTO-compatible and fair, forcing importers of goods such as steel to buy emission certificates at the same price as domestic producers.

However, a demand from EU producers to continue to benefit from the free certificates from the EU carbon market could create problems if imports do not receive a similar benefit.

A draft of the July 14 proposals shows free permits would end, but manufacturing sectors should push to keep them. Read more

Benchmark prices on the EU’s Emissions Trading System (ETS), the world’s largest carbon market, hit record highs above 58 euros per tonne this month, partly in response to the expectations of the border tax.

While the EU says it and Washington have agreed to discuss the plan, other countries have raised concerns. Australian Prime Minister Scott Morrison calls any carbon tariff “trade protectionism by another name”. Russia has said it could break trade rules. Read more

Andre Sapir, senior member of the Brussels-based Bruegel think-tank, who testified before Parliament on CBAM, says the European Union must look beyond mere legality.

“There is also the issue of equity. Advanced countries have been long-term emitters. Deforestation, advanced countries have done too,” he said.

BURDEN OF PROOF

The WTO grants preferential treatment to developing countries, as does the EU with arrangements for the poorest states. If they don’t extend to CBAM, the charges could hit $ 16 billion in exports from developing countries to the EU, according to think-tank Center for European Reform.

Even a WTO-compatible system with allocations for emerging countries could disrupt trade if it adds a heavy administrative burden.

Companies in countries, such as South Korea, with existing emissions trading systems could adapt smoothly to CBAM. Elsewhere, exporters should provide detailed data on their direct carbon emissions and those of their energy sources, then convince the European Commission that the data is reliable.

Otherwise, they could face an unfavorable default calculation.

“The burden of proof is on the other side,” said Hosuk Lee-Makiyama, director of the ECIPE trade think tank. “CBAM can be an excellent bet for trade negotiations, but will it really provide incentives to reduce CO2 emissions? “

The complexity of the system convinced the European Commission, at least initially, to focus on a few basic materials – iron and steel, aluminum, cement, electricity and fertilizer, which account for around 5% of the country’s merchandise imports. EU.

However, there may be ways for exporting countries to get around them. Thijs Vandenbussche, climate policy analyst at the European Policy Center think tank, points to possible substitutes, such as fuel ash or blast furnace slag, for cement, which may not be subject to carbon charges.

Downstream, CBAM could persuade manufacturers of end products to change components. In some cases these could be more environmentally friendly, in others simply not subject to additional emission costs although they are also or more polluting. In the latter case, global emissions would not decrease.

If the EU wants its experiment to be a success, it will need partners. A transatlantic alliance could lead to widespread acceptance. However, comments by US Climate Envoy John Kerry that a carbon border tax should only be a “last resort” suggest that such an alliance is far from over.

Just over 50 WTO members began discussions on climate issues like border carbon adjustments last year, but these are still in their infancy. One function of the CBAM is to have made the debate more pressing.

“International carbon pricing is one of the slowest things to move forward,” said Vandenbussche. “Without this proposal, there would be no more debate. This could lead to negotiations and perhaps adjustments depending on the international reaction.”

Reporting by Philip Blenkinsop; edited by Mark John and Barbara Lewis

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