Jean-Francois Badias/AP Photo
The Butachimie chemical plant in Chalempe, eastern France, on November 8, 2022
The European Union last week reached a deal to tax imports based on their carbon emissions, moving one step closer to throwing up a new border tariff that has drawn protest from big trading partners, including the U.S., Russia, and China.
It comes on the heels of European nations crying foul at the Biden administration’s tax credits for American-produced clean energy as part of the Inflation Reduction Act (IRA). In both cases, the climate crisis has become a means by which countries revive their own industrial policies.
The tax, called the Carbon Border Adjustment Mechanism (CBAM), aims firstly to address a domestic problem. Currently, European companies in polluting sectors like steel, cement, and fertilizer receive a certain number of greenhouse gas allowances under the bloc’s internal emissions trading system. But Europe is phasing out those free credits, forcing manufacturers to bring down their emissions.
As Europe clamps down on polluters, there is a risk that it could simply start exporting its emissions. Companies could move production offshore to zones with less stringent climate regulations, while consumer goods made in Europe could become less competitive with cheap and dirty imports.
Indeed, that already appears to be happening. As European countries have brought down domestic pollution levels, the emissions embedded in their imports have risen, according to a memo by the European Parliament. Imported goods and services now make up more than 20 percent of the EU’s CO2 emissions.
Given the self-imposed cost of going green, the CBAM explicitly looks to make European manufacturers more competitive with foreign producers. Europe says that’s fair. In compliance with World Trade Organization rules, it isn’t discriminating against any particular country, just leveling the playing field.
But this means top trading partners like the U.S. will now face a steep carbon bill when docking at the ports of Rotterdam or Antwerp. The European Parliament’s proposed inclusion of chemicals and plastics as a taxed sector has particularly angered U.S. industry, which sends billions of dollars in petrochemicals to the EU each year.
The U.S. has attempted to discourage the CBAM. Climate envoy John Kerry warned Europe against proceeding with the border tax, saying last year that “the United States has strong feelings about not having excessive regulation.” Sens. Chris Coons (D-DE) and Kevin Cramer (R-ND) have argued for greater EU-U.S. cooperation on carbon border tax design. In a Wall Street Journal op-ed last week, Cramer argued for an “alliance of developed countries on climate and trade policies.”
MANY OFFICIALS IN DEVELOPING COUNTRIES also object to the CBAM scheme. Countries that are still industrializing tend to have more carbon-intensive production that is more reliant on coal. That creates a global skew: Rich countries like the U.S., Japan, and the U.K. are net carbon importers. China is by far the top carbon exporter, followed by Russia, India, and South Africa. Smaller countries like Mozambique, where aluminum and steel exports are a big slice of GDP, could be especially rattled by new import tariffs.
Given that balance of trade, the CBAM is likely to exacerbate global inequality by giving richer countries a competitive advantage, and hindering the growth of export sectors in emerging markets. A study by Boston University’s Global Development Policy Center attempted to quantify the damage. The researchers found that if the CBAM is expanded from the core sectors in the current pilot phase to include all goods and services, as European officials plan, it could decrease total exports from Ukraine and India to the EU by as much as 39 percent and 22 percent, respectively. Even under the current, industry-specific CBAM proposal, the model finds that exports from Ukraine into Europe would drop by more than 10 percent.
The CBAM is likely to exacerbate global inequality by giving richer countries a competitive advantage.
Kevin Gallagher, a professor of global development who directs the center, said he ultimately supports carbon taxes with border tariffs, since they create good long-run incentives to raise green standards.
“But they are also unfunded mandates to the countries that didn’t cause the problem in the first place,” he told the Prospect. “Western countries, their development banks, and the IMF have been going out of their way for decades to make sure developing countries specialize in fossil fuel export sectors, and to just cut the cord is unjust and will foster instability.”
Work-arounds have been proposed. But the EU shot down proposals for tax waivers for developing countries, arguing that they would violate WTO rules and could encourage offshoring emissions. Climate diplomacy expert Faten Aggad questioned that claim in a Twitter thread on the CBAM’s consequences for Africa.
Several advocacy groups suggest using proceeds from the tariff to sponsor sustainable development, although that would likely have to be negotiated after the CBAM is passed, because EU law prohibits earmarking revenues for this type of new instrument.
Not everyone agrees. “I am not a supporter of the ‘let’s use CBAM revenue for climate finance,’” Aggad wrote. “Effect is that we’d be disincentivising industrial development & having major impact on economies in return for ODA [official development assistance]. It is a matter of structural transformation vs ODA approach.”
THE BORDER TARIFF RULES COME as Europe scrambles to revive its own industrial policy. The CBAM has been in the works since 2019, as part of Europe’s broader package of policies for a continent-wide “Green Deal.”
But in recent months, European officials have taken notice of the United States’ efforts to make its clean-energy companies more competitive with subsidies through President Biden’s climate and jobs IRA legislation.
“There is a risk that the IRA can lead to unfair competition, could close markets, and fragment the very same critical supply chains that have already been tested by COVID-19,” European Commission President Ursula von der Leyen said in a speech earlier this month that criticized the IRA’s Buy American provisions and “production subsidies that could lead to a subsidies race.”
Von der Leyen called for loosening Europe’s constricting state aid rules, in a turn away from neoliberal orthodoxy that signals more green spending, but could also unleash a transatlantic trade war. Without greater coordination, the U.S. and Europe’s contending economic nationalisms are likely to harm developing-world exporters.
“Europe is already seeking bilateral agreements with the U.S. to mitigate the impacts that the IRA will have on European producers,” Pierre Leturcq, a policy expert at the French think tank Institut Jacques Delors, told the Prospect. “Yes, we shouldn’t be trade purists, but at the same time, provoking a subsidy race can only benefit the richest countries in the world. The U.S. would be the natural winner of such a race. China as well. The EU is right after. But then, how will developing countries and the poorest regions compete?”
