31/07/2021 Carbon border taxes are defensible but bring great risks | The Economist

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Leaders Jul 17th 2021 edition

Climate change

Carbon border taxes are defensible but bring

great risks
The EU’s proposal may set off another trade war

Jul 15th 2021 Give this article

C arbon prices are the most cost-effective way to fight climate change—but for
them to work properly, emissions must be priced everywhere. On July 14th the
European Commission unveiled its plan to levy what would, in effect, be a tariff on
some carbon-intensive imports which, by virtue of having been produced outside
the eu, are not subject to its cap-and-trade carbon-pricing scheme. The idea is to
stop European firms from responding to the carbon price by moving production to
parts of the world where they can pollute without penalty, to shield them from
being undercut by rivals from such places and to encourage foreign firms who want
to sell to Europe to go green.

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There are sound reasons for applying carbon prices to imports. But working out
how to go about it without causing a cycle of damaging protectionism is a
conundrum.

Were carbon prices global, the costs of fulfilling the Paris agreement on climate
change could fall by 79%, according to the Environmental Defence Fund, a think-
tank. Market forces would find the cheapest ways to cut emissions. Yet a worldwide
carbon market is a pipe dream. (China is due to launch the world’s largest
emissions-trading system on July 16th, after we go to press, but permits will be far
too cheap.) Carbon tariffs are a fallback measure.

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Free traders like The Economist typically reject tariffs on principle. Cheap imports
bring lower prices, more choice, higher productivity and incentives to innovate.
Firms and workers constantly plead for protection from foreign competitors,
alleging that jobs and profits must be shielded from unfair foreign competition.
Liberals respond that the harm done to incumbents by the free operation of markets
—what economists call “pecuniary externalities”—do not, unlike other types of
harm, justify government intervention. “Society admits no right, legal or moral, in
the disappointed competitors, to immunity from this kind of suffering,” wrote John
ill i f h i f d d
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31/07/2021 Carbon border taxes are defensible but bring great risks | The Economist
Stuart Mill in 1859, 16 years after The Economist was founded to oppose the Corn
Laws, which kept cheap food out of Britain to the benefit of its incumbent
landowners.

Carbon tariffs, however, would not be inherently protectionist. They are an attempt
to expand the reach of market forces rather than to limit them. The opportunity to
pollute the atmosphere without penalty is itself a kind of distorting subsidy; more
so if it exists unevenly across borders. Preventing climate change is a global public
good, meaning every country’s citizens have a direct interest in reducing emissions
wherever they happen. Pricing carbon at the border should therefore be viewed as a
special case, and not as a precedent for using tariffs as a bludgeon with which to
impose local regulations or standards abroad.

The problems with carbon tariffs are thus not moral or economic but practical and
political. Implementing the policy fairly would mean ascertaining how much
carbon has been emitted in the production of a given import, and to what extent
foreign governments had already taxed those emissions. In 2018 the European
Commission said that would be “clearly unmanageable”. Not much has changed
since.

The eu’s new plan applies only to select industries which at present are protected
using subsidies. The products involved, such as cement and fertiliser, are
commonplace. Even so, the plan relies on arbitrary rules. Where the carbon
intensity of a foreign producer’s processes cannot be estimated they will be
assumed to be as dirty as the worst 10% of European companies.

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Incumbents are rubbing their hands at the prospect of outsiders drowning in

paperwork. Some members of the European Parliament are trying to amend the
plan to favour local firms. John Kerry, America’s climate envoy, has said that the
United States is also looking at carbon border taxes. That is indefensible unless
America implements a proper carbon price at home.

The imf has an alternative idea to tariffs: a globally negotiated minimum carbon tax
which varies according to gdp. But it is not clear that it is achievable. William
Nordhaus, a Nobel-prizewinning environmental economist, thinks willing
countries should form a climate club within which carbon is priced and then
simply levy flat punitive tariffs on those countries which refuse to join.

It is just about possible to imagine a successful path to a global carbon price that
involves tariffs. But any such plan is fraught with the risk of capture and
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31/07/2021 Carbon border taxes are defensible but bring great risks | The Economist

protectionism. Governments must tread with care—while also recognising that

failing to price carbon adequately may be the greatest danger of all. 7

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This article appeared in the Leaders section of the print edition under the headline "Carbon and capture"

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