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Taxation

An EU Carbon Tariff Is Policy Mischief

Unsplash Creative 0.0: Photo by Maxim Tolchinskiy

A carbon adjustment would be bad news for consumers...

In November of 2020, the European Roundtable on Climate Change and Sustainable Development accepted a paper on the concept of carbon border adjustments, otherwise known as carbon tariffs. It is now widely understood that the EU is seriously considering implementing a new regime of carbon tariffs as part of its overall climate strategy. 

Simply put, carbon tariffs would be taxes on goods from countries that do not meet the EU’s  level of environmental protection. Their main purpose is to avoid “carbon leakage,” in which companies move to countries that don’t impose costs on carbon.

The problem with this, first and foremost, is that tariffs are taxes paid for by domestic consumers, which means the end result is European consumers footing the bill via higher prices on international goods. At a time when all of Europe is eyeing the end of the pandemic, and the worrisome economic recovery that will follow, a price inflating carbon adjustment would be troublesome to say the least.

Supporters of this policy will argue that a border adjustment will have the positives of encouraging high emission exporters to clean up their act, and benefit European industry in the process. The thought process is that if foreign goods become more expensive, EU goods will become comparatively cheaper.

On getting high emission countries to meet European climate standards, it is naive to assume that the developing world can meet such benchmarks. As many in the development policy arena have rightly pointed out, the developed world propelled itself to its current status by first focusing on growth, which is what now allows Europe the luxury of enacting policies to protect the environment. Because of that, I’m hard pressed to see the developing world have the capacity, in the short-medium term, to create the infrastructure necessary to meet EU standards.

This means that the adjustment just serves as a tool to tilt the scales toward domestic industry. While that shift may seem positive to some, the Trump Administration’s tariffs give us a real life case study on why this is immensely negative. While the reasons for these tariffs were populist in nature, the lessons hold true for tariffs pushed forward for other policy goals.

Looking at the impact on washing machines, Trump’s tariffs increased the tariff on these goods to 20% on the first 1.2 million units imported, and to 50% for all units imported after that amount. The result was a 12% increase in the price of imported washing machines, and dryers, which despite not being taxed are often sold in pairs. Unfortunately, consumers were also faced with higher prices for domestic washing machines, largely because domestic producers were able to increase their prices as their competitor’s prices increased. For consumers, the end result of this policy was a price increase of around $88 per unit, which totaled to a total price inflation of $1.56 billion, generating $82.2 million in tariff revenue.

Now, supporters of tariffs might argue, as Trump did, that even though consumers were paying more for imported goods, and ironically domestic goods as well, the policy had the positive effect of emboldening domestic industry and creating jobs. This is actually true, the policy did create manufacturing jobs in the United States, approximately 1800 new positions. The problem is that those jobs came with an enormous cost for US consumers, so much so that American consumers paid $811,000 in higher prices per job created. This doesn’t even remotely come close to passing a cost benefit analysis.

We don’t know what the rate of the carbon adjustment would be, although it is likely that, per WTO rules, it would have to match whatever domestic rates of carbon taxation are. If the carbon tariff were to match, lets say, France’s domestic carbon tax of €44.81 per tonne of carbon emissions, the impact of a carbon adjustment would be significant. Take the figures from Trump’s washing machine fiasco, and apply those lessons to all products imported to Europe from high emission countries, and the bill consumers will have to shoulder is nothing short of astronomical.

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