By Hugo Dixon
SHARM EL-SHEIKH, Egypt- Trade is a major cause of global warming. Think of all those goods travelling from far away on polluting ships — and raw materials and components whizzing across the world in complex supply chains.
But the right trade policies can also do a lot to save the planet. The solution is to tax trade in carbon-intensive goods and get rid of tariffs on clean ones — while also subsidizing green technologies and stopping aid to dirty ones. And to do all this fairly.
Trade wasn’t prominent at COP27, the United Nations climate conference which just finished in Egypt. It needs to be central by the time of next year’s COP28 in Dubai. Five principles would make a big difference.
The first step is to have even-handed carbon tariffs. Taxing companies according to the amount of carbon they emit would do a lot to stop climate change. It would encourage them to cut their emissions and switch to cleaner technologies. The International Monetary Fund thinks a tax of $75 for each ton of carbon emitted by 2030 would do the trick.
The snag is that, while 46 countries have put a price on carbon, the average price is only $6 per ton. Of the major economies, only the European Union and United Kingdom are pricing carbon at or above $75 a ton. This puts their industries at a competitive disadvantage. If these countries end up importing cheaper, more carbon-intensive products from abroad — something known as “carbon leakage” — the planet could still suffer.
That’s why the EU is expected next month to finalize plans for a Carbon Border Adjustment Mechanism (CBAM). The idea is to impose tariffs on imports from countries that don’t tax their companies enough for the carbon they emit, starting in 2026.
The plan could prod other countries to introduce their own higher carbon levies. But it could also trigger trade disputes, especially with the United States, which has no plans to introduce carbon taxes. Even if President Joe Biden wanted to, he couldn’t get legislation through Congress. His administration argues that what really matters is cutting carbon emissions — and that US regulations and subsidies have a similar impact to a tax.
Unfortunately, there’s no agreed methodology on how to compare regulations and carbon taxes. The issue doesn’t just apply to the EU’s CBAM, but also to carbon tariffs that other countries might launch. Particularly controversial is the idea that America might tax imports without taxing the carbon emitted in home-made production. The World Trade Organization is worried that imposing carbon tariffs in an uncoordinated way could damage global trade and is working on a framework to avoid this. — Reuters
