World considers carbon border taxes after Copenhagen failure

C&I Issue 2, 2010

After the failure of the Copenhagen climate conference to come up with any binding emissions targets it appears that many countries around the world might take matters into their own hands. A number of countries in the industrialised world have already signed up to domestic commitments to cut carbon emissions and are now trying to come to terms with emissions caps and carbon taxes that they fear will damage their economy, particularly heavier industries such as chemicals. This has led to a renewed interest in the idea of carbon tariffs or border taxes on other country’s goods based on the idea that ‘the polluter pays’ – at least they pay if they have not enacted legislation to reduce carbon emissions.

‘Certainly there are countries thinking of enacting tariffs, mainly on the back of the failure of Copenhagen,’ says Alex Desbarres, senior renewables analyst at Datamonitor. He adds that any carbon tariffs applied by the industrialised economies to goods coming from the developing world are likely to prove highly contentious.

The idea of a carbon tariff on goods coming from countries that shun tough measures to address climate change has been raised by several countries, including France, Germany and the US, but questions remain over the legality of such a measure as it would be an artificial barrier to free trade. President Nicolas Sarkozy is leading the charge in the EU on carbon tariffs, although his own plans for a domestic carbon tax were recently rebuffed for giving too many industrial polluters a free ride. Sarkozy’s government had proposed a flat rate tax that was to have started in January 2010 and would have put a price on carbon of around €17/t. France’s constitutional watchdog, however, said that 93% of industrial emissions, excepting transport fuels, would have been exempt from the tax. The tax was expected to raise €4.3bn/ year and the government has vowed to go back over the legislation with the goal of implementing the carbon tax on 1 July 2010.

In the US, bills currently being considered in the Senate and Congress have provisions that enable the president to enact carbon tariffs to protect trade sensitive sectors. However, these types of tariffs are only likely to be imposed under very specific and stringent conditions, Desbarres says, and even then are unlikely to come into effect until 2022.

Philippe De Casabianca, senior counsellor communication, energy, HSE and logistics programme at the European Chemical Industry Council (Cefic), says that industry is generally concerned about an introduction of a carbon tariff on foreign goods coming into the EU, pointing out, for example, the difficulties it would create when implemented on an unilateral basis. ‘A border tax would be very difficult to implement, ineffective and potentially highly harmful,’ De Casabianca says. ‘How do we handle complex goods like cars? A single country does not produce all the raw materials to produce it. Furthermore, countries faced with such border measures could introduce tit-for-tat retaliation measures that could bring the EU into a trade war.’

There may also be problems with trade bodies. De Casabianca says that such tariffs go against the current trend of increasing free trade throughout the world – the globalisation of the world market. He adds that the World Trade Organization, the body charged with regulating global trade, is very sensitive to attempts to limit trade.

The incoming EU trade chief, Karel De Gucht, also came out against this type of border tax at a confirmation hearing in Brussels. ‘I don’t see that as the right approach – it’s one that will lead to lots of practical problems,’ De Gucht said. He warned that there was a risk of an escalating global trade war and that other, better, market oriented approaches to tackle carbon leakage and overseas emissions were available.

James Handley, Washington DC representative for the Carbon Tax Center, a non-profit advocacy organisation working to reduce greenhouse gases around the world, says that a carbon tariff trade war would not be so bad from his point of view. He says that if carbon tariffs are implemented by one country and other countries respond in kind then this would have the effect of successfully putting a price on carbon – something that the Copenhagen summit failed to do. Handley says that the whole idea of Kyoto – trying to divide up emissions quotas between competing countries – was always going to be difficult and carbon tariffs are a far more realistic way to tackle climate change. ‘Trying to slice up a pie that keeps getting smaller and smaller was unlikely to lead to a stable agreement,’ he says.

Desbarres says that tariffs could also be used as a stick to push other countries towards a global agreement on emissions. ‘I think some countries will use tariffs to put some pressure on decision-makers ahead of COP-16 in Mexico,’ he says.

The EU will need to think carefully about its next move, according to De Casabianca. He points out that the EU was in effect snubbed at Copenhagen and not invited to the final round of frantic negotiations. ‘The EU thought if it set a good example as a frontrunner [in tackling climate change] others would follow, but that didn’t happen.’

Europe’s carbon taxes

Despite France’s stalled attempt to enact a carbon tax within its own borders, many European countries have already unilaterally imposed a tax on greenhouse gases. The UK, rarely considered one of the greener nations in Europe when it comes to action on climate change, rather than rhetoric, introduced the relatively unremarked upon climate change levy in 2001. The levy imposes a flat rate on fossil fuels and electricity used by industry, commerce and the public sector. A rebate of 80% on the levy was available if the business signed up to a Climate Change Agreement to cut its emissions, although the UK government recently announced in the pre-budget report that the rebate would be cut to 65%.

Finland was the first country in the world to enact a carbon tax in 1990 and it currently imposes a levy of €20/t of CO2 on all fossil fuels and electricity. Norway, the Netherlands, Finland and Denmark have all implemented similar flat rate taxes, while Ireland is in the process of enacting one.

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