Contributed by Robert Lyman © 2022. Robert Lyman’s bio can be read here.
The European Union has agreed to impose a carbon dioxide border tariff. This is a tariff, or tax, on the import of goods from other countries based on an estimate of the “embedded carbon” or the carbon dioxide emissions associated with the production of the goods. The tariff, which is called a “Carbon Border Adjustment Mechanism”, or CBAM, will be implemented in phases starting in 2023 and extending initially over three years. During that period, the CBAM will apply only to a small number of products – cement, iron and steel, aluminum, fertilizers and electricity. Its coverage will be expanded later.
The ostensible purpose of the tariff is to discourage “carbon leakage”, the term used to describe the loss of sales, investment and activity by industrial plants in Europe. European industry has called for such measures to protect them from being undercut by less expensive goods made in countries that either do not share the EU’s obsession with greenhouse gas (GHG) emissions reduction, or have lower carbon dioxide tax rates.
The legislation to authorize the CBAM will require importers to register with national authorities and seek authorization to import goods covered by the tariff. The price of the certificates to import will be calculated on the weekly average auction price of EU Emissions Trading System (ETS) allowances expressed in euros per tonne of CO2 emitted. In 2021, according to the European Commission, the average emissions trading permit price was US $95 per tonne of carbon dioxide equivalent. As the EU lowers the cap on emissions in future to meet its “net-zero” emissions target, the level of the emissions permit price will rise correspondingly.
The advocates of the CBAM believe that the rest of the world will so value its access to the EU market that it will be forced by circumstances to adopt the same or similar schemes. In other words, they think that other countries will introduce carbon dioxide taxes or emissions trading system that raise the cost of carbon dioxide emissions to their consumers to the same levels that prevail in Europe.
Advocates of CBAM have shrugged off concerns that the introduction of new and large tariffs on international trade will run counter to the rules of the World Trade Organization. However, there are good reasons to doubt that the EU’s CBAM tariffs will avoid successful challenges under international trade law. The CBAM thus still poses some risk of inciting a trade war.
The design of the CBAM as developed so far is a bureaucrat’s dream and business nightmare. A host of officials will have to be employed figuring out how to identify and quantify the carbon dioxide emissions associated with each imported good. Even for the relatively short list of goods initially covered by the new regime, the temptation will be to use industry averages, thus disadvantaging some firms whose emissions per unit of production are lower than the average. Another army of officials will be required to register, review, track and verify the applications for certificates. A counterpart set of thousands of staff and consultants will be employed by industry to comply.
The CBAM will eventually apply to tens of thousands of traded goods for which the embedded carbon dioxide is a substantial share of the costs. The magnitude of the regulatory effort that may be involved is breathtaking.
Ultimately, the idea that all other countries would adopt European-style taxes and restrictions on products made using hydrocarbons, including the highest carbon dioxide tax rates in the world, is not credible. The European Union may view itself as a model for the world but this alleged form of environmental leadership, and the reality behind it, will not inspire most other countries to harm their economies and standards of living.