The moral conundrum of carbon border taxes

Will a carbon trade war help or hinder the energy transition?

On paper, a carbon border tax is the perfect mechanism for coercing trade partners to reduce their emissions and, potentially, deliver a global deal on carbon pricing – the Holy Grail of COP26. In reality, world leaders are unlikely to agree on rules for a global carbon market, meaning border taxes will be introduced unilaterally. These will punish exporting countries that do not decarbonise their energy-intensive products, even if development finance promised to help them transition fails to materialise.

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Climate change is primarily the consequence of Western industrialisation. Poorer nations played only a minor role in contributing to atmospheric CO2 inventories, yet will experience among the worst effects and are least prepared to deal with them.

Europe and North America account for the lion’s share of coal, oil and gas burned to date since the industrial revolution. As they grew wealthier, Western nations offshored large chunks of their domestic manufacturing base to developing countries with lower labour costs and environmental standards.

This proved to be a quick and effective means to outsource the West’s emissions problem and cultivate a narrative of shared climate responsibility. At the same time, Western finance poured into overseas fossil fuel infrastructure to keep factories producing cheap goods for Western consumers.

Now, the European Commission and US government are negotiating a pact to impose border taxes on steel and aluminium imports according to their carbon footprint. This would force overseas producers to either decarbonise their operations or pay carbon prices equivalent to those set in Western economies.

The EU is already ploughing ahead with its own carbon border adjustment mechanism (CBAM), which will levy a tariff equivalent to the going rate for EU carbon allowances on imports of cement, iron and steel, aluminium, fertilisers and electricity.

Smelters in Sweden recently produced the first batch of zero-emissions ‘green’ steel, proving that hard-to-abate sectors can in theory decarbonise. But money matters, and pilot projects such as this one receive generous government support. Rival producers in other parts of the world can’t readily replicate this success.

When CBAM is phased in from 2026, it is conceivable that ex-EU suppliers of affected goods will have to compete on price terms adjusted for emissions that they cannot avoid.

The idea is that CBAM incentivises fuel switching outside the EU, so EU Commissioners ostensibly wish for CBAM revenues to be zero. But they must know that switching will take time. Some have even hinted that carbon taxes will fill EU coffers.

CBAM therefore creates a perverse incentive for EU countries not to help their trade partners decarbonise energy-intensive industries. The less climate aid the EU sends overseas, the more those countries must pay in carbon taxes to trade with Europe.

This outturn would accentuate the transfer of wealth from poorer to richer nations, and fall under the umbrella term of ‘carbon colonialism’: economic subjugation disguised as climate progress.

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All stick, no carrot

The government of India has vocally opposed carbon border taxes, saying these go against principles of differing climate capabilities and responsibilities, as enshrined in the 1992 UNFCC treaty.

To underscore this narrative at COP26, India published an online Climate Equity Monitor to highlight the developed world’s ‘carbon debt’ and the ‘carbon credit’ owed to the Global South…

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