Carbon border tax could transform world trade but raise prices

Developed nations support CBTs that encourage other countries to slash emissions

A view of the Port of Felixstowe in Britain. Carbon Border Taxes apply a levy on emissions attributed to imported goods that have not been carbon-taxed at source. Reuters

Carbon border taxes could transform world trade but the cost of the levies would lead to higher prices, the UK’s Centre for Economics and Business Research said.

While the EU and the US are in favour of CBTs – a levy on emissions attributed to imported goods that have not been carbon-taxed at source – the UK is largely supportive but is adopting a cautious approach as it fears the EU might use them as post-Brexit protection, the Cebr said.

“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,” Cebr said on Monday.

“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.”

But such a move would push up the price of steel by more than 10 per cent, petrochemicals by 5 per cent and electronic goods, machinery and vehicles by up to 5 per cent, Cebr said, citing a Greenpeace study.

“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 revenue to pay for other things,” Cebr said.

The drive to address climate change is stepping up across the globe with the International Monetary Fund's chief executive Kristalina Georgieva urging countries to take immediate action to avert disasters.

Ms Georgieva said last month that stepping up will accelerate the push for greener economies and boost the recovery from the Covid-19 pandemic, with a policy mix of carbon taxes and green investment potentially increasing global output by about 0.7 per cent over the next 15 years and creating about 12 million new jobs by the end of 2027.

US President Joe Biden is already considering the idea of imposing a border adjustment tax on high-carbon imports that come from countries with weaker climate policies. At the same time, suppliers at home would receive a carbon-related rebate to help boost their exports.

John Kerry, the White House’s special envoy for climate said that Mr Biden was “particularly interested in evaluating the border adjustment mechanism”.

The idea has been gaining interest from world leaders as a way to shield domestic workers making energy-intensive goods while encouraging other countries to slash emissions. The tax would discourage companies from shifting operations to nations with less stringent rules, which results in carbon leakage.

Last month, the European Parliament approved moving forward with a CBT plan, with details expected this summer for a pilot programme set up by 2023.

Meanwhile, British Prime Minister Boris Johnson urged G7 countries to enact carbon border taxes, as the UK's focus switches to climate change ahead of the UN-hosted Cop26 summit in Glasgow in November.

Cebr said the key conflict over CBTs would be between those who argue that net-zero commitments over various timeframes will be sufficient to limit global warming to acceptable levels and those who argue for them to be supplemented by CBTs.

“Expect pushback, especially from China and India. The EU is estimating revenue of €5-14 billion ($6-16bn) per annum from these taxes which, critically, will be received by the cash-strapped European Commission," Cebr said.

While a CBT aims to prevent environmental regulatory arbitrage by taxing the carbon content in imports, the current EU proposal aims to impose a tax on goods imported into the economic bloc by 2023 that would reflect the amount of carbon dioxide emissions attributed to their production, Cebr said.

“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,” Cebr said.

Cebr analysed carbon footprint data to assess who might be negatively affected by such a move and found that if a CBT was based on the carbon intensity of electricity generation, there would be some surprising winners and losers.

“China’s intensity is only 0.55 tonnes of CO2 per megawatt hour, only a little bit higher than that of USA (0.45), whereas Australia’s is 0.79," Cebr said.

“The respective figure for the UK is 0.25, for France it’s 0.04, for Germany 0.38 and for India 0.71. This illustrates why the US has traditionally been less in favour of CBTs, while France is an enthusiastic proponent.”

Cebr said the arguments against CBTs include the level of bureaucracy required, which could in turn be subject to pressure to grant special favours.
When goods are made in the EU, manufacturers are often required to buy permits for the climate-warming carbon emissions that are produced in the process.
Cebr said many of the most carbon-intensive businesses in the EU have been granted free carbon permits with the countries likely to lose out then tempted to retaliate.

There could also be a backlash among companies that would be hurt by rising import costs, such as car makers and construction companies that use steel products. Their annual profits could fall by 40 per cent, a Boston Consulting Group study of the EU carbon border tax proposal found.

More on climate change