Why a border carbon tax is a necessity
One of the best ways to fight climate change is for governments to do what the markets can’t: put a price on greenhouse gases. A “cap and trade system” where companies have to buy emission permits, which they can then trade among themselves, or an outright carbon tax lets companies focus on what they do: decide , depending on the price, what to produce. Yet where governments have followed this path, they have faced a new problem. In the absence of a global carbon price, companies face competition from exporters from elsewhere who can produce at lower cost.
This makes a border carbon tax a necessity. A functioning emissions trading system needs some means of border adjustment to ensure that imports and domestic production are treated the same. This is essential to create a level playing field and prevent “carbon leakage” when measures to reduce emissions in one country lead producers to move to another with more flexible standards.
While it is an environmental imperative, carbon taxes at borders will however be difficult to implement. Depending on their design, they could fall under World Trade Organization measures designed to prevent importing countries from discriminating against particular exporting countries, giving an advantage to certain WTO members with better records. of climate change. For businesses, this will increase the administrative burden of crossing borders and increase trade frictions, especially for small businesses. This will inevitably reduce choice and increase costs for consumers.
the The leak of the EU proposal for a carbon border adjustment mechanism seems like a good first step. According to the proposals, companies should make up the difference between their carbon price in their country and the EU emissions trading system, ensuring fair competition. Officials say this would be allowed under WTO rules, as it would be levied on individual companies rather than countries. Countries opposing it could signal that the EU is granting free permits to domestic producers, giving them an unfair advantage. The arguments will inevitably be tested at the WTO.
Other parts of the proposals are also welcome. The scheme would be phased in and would only apply to a handful of sectors. This would give companies time to adjust, but also provide a rock-solid commitment that would reduce the incentive to gradually relocate production elsewhere. The program would include the most polluting sectors, such as electricity and steel, heavily affecting many of the EU’s closest neighbors, but not the US, potentially avoiding at least part of the international response.
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There are also flaws. There is no allowance for least developed countries – although the inclusion of one could lead to further objections to the WTO. While only a handful of the poorest countries export substantial amounts of carbon-intensive products to the EU, incorporating such an allocation would make sense, especially given that rich countries are dragging their feet to provide financial assistance to help with the energy transition.
Tackling climate change will inevitably be difficult, both politically and technologically. The proposal relates in part to the EU’s domestic policy: as the cost of permits in the EU’s emissions trading system has risen, European steel producers have been pushing for a border tax. It is also a way of putting pressure on other countries to do the same. Compared to all the other challenges associated with ending global warming, designing a border carbon tax should not be insurmountable.