The UK has given a high level of priority to the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow on 1 – 12 November 2021, with a leading Cabinet Minister, Alok Sharma, being specifically tasked with making the conference a success. This partly reflects the country’s need to acquire a different international status post Brexit.
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 The respective figure for the UK is 0.25 (thought this is slightly out-of-date, it is now nearer 0.2), for France it’s 0.04, for Germany 0.38 and for India 0.71.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.
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1: COUNTRY SPECIFIC ELECTRICITY GRID GREENHOUSE GAS EMISSION FACTORS, Carbon Footprint, Last Updated: September 2020