Is Europe Right to Reject Carbon Tariffs?

Posted by: Mark Scott on July 27, 2009

It’s not every day Europe gives the U.S. lessons on free trade. But when it comes to climate change, that’s exactly what’s happening. Last week, European politicians rejected plans to impose a so-called ‘carbon tariff’ on goods from countries (read: emerging economies) that don’t curtail their CO2 emissions. That contrasts with Congressional plans to slap a tariff on imported foreign goods that don’t meet international standards on carbon reductions.

The Europeans’ move is the latest in the mounting fight over who should shoulder the cost of global warming. On one side, many in Western economies (including some policymakers in Europe) favor a carbon tariff. Politicians fret domestic industries will face higher costs from cap-and-trade carbon schemes, which will make them less competitive against foreign rivals. On the other, the developing world and many economists reckon such measures will have limited impact — and will lead to a growing spate of global protectionism. “There are two problems [with carbon tariffs] — the WTO (World Trade Organization), and the signal would be that this is a new form of eco-imperialism,” Matthias Machnig, Germany’s secretary of state for the environment, told reporters on July 24.

The fact Europe, which has the most-established carbon market in the world, hasn't embraced carbon tariffs is an encouraging sign for those seeking to entice emerging economies into a global cap on greenhouse gases. By not slapping tariffs on products from China, so the theory goes, Beijing policymakers could be more willing to agree to voluntary cuts -- instead of being forced to do so through legislation passed in the Western world. The fact many experts reckon high-level discussions currently underway between the U.S. and China won't amount to much, though, doesn't bode well.

More importantly, a debate over carbon tariffs is now greater than ever. In a (slightly out-of-date) analysis, Jeff Rubin and Benjamin Tal at Canadian investment bank CIBC World Markets make some interesting points (Pages four to eight in the PDF). By not imposing a carbon tariff, write Rubin and Tal, the developed world doesn't price in the total cost of its own carbon output. Western companies outsource their emissions to less-efficient manufacturing plants in emerging economies, while countries like India and China have contributed the lion's share of CO2 increases over the last decade.

According to the report: "China's export sector alone is the largest emitter globally, producing more emissions than the entire Russian, or Germany, or Japanese economy...

"North American power is a lot less coal intensive than Chinese power. Secondly, energy efficiency in North American plants is 30% higher than in Chinese plants"

Developing countries respond North America and Europe still emit more than half of the world's overall carbon emission. And that based on per capita, emissions from, say, Brazil are significantly lower than similar figures from a more developed country. Economists also warn slapping a carbon tariff on world trade -- just as the global economy tries to recover from the worst downturn in living memory -- could undo the benefits of the recent multi-billion dollar stimulus packages.

The unintended economic consequences were the main reason behind Europe's most-recent rejection of carbon tariffs. The continent has a five-year track record reducing carbon through cap-and-trade. And after an early loss of competitiveness (for a small number of industries), most companies have embraced the scheme, even benefiting from investments in low-carbon and/or energy-efficient technology.

Yet with the U.S. putting its foot down over carbon tariffs, the debate will trundle on. Look for the issue to become a key negotiating stumbling block ahead of a Copenhagen summit in December to negotiate a replacement to the Kyoto Protocol.

Reader Comments

Bill

July 31, 2009 12:40 PM

If you ask me, this carbon tariff isn’t a bad idea, but we’re targeting the wrong people...Research shows that the world's wealthiest 7% cause about 50% of global emissions (study by Princeton University, check it out). Isn’t it just as important to regulate these rtich INDIVIDUALS as it is counries or industries? If carbon offset services continue to gain popularity, that might help solve the problem. I thihnk Belgrave Trust (it might be Belgrade not sure) is one that’s been catching on with the wealty so obviously that’s important, keep your eye on it. Otherwise, I have no problem if the government starts slapping the rich and their mansions and yachts with carbon tariffs. Good riddance!

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BusinessWeek correspondents John Carey and Mark Scott, cover the green scene, keeping on top of the business aspects of energy, the environment and climate change, as well as the technologies, policies, markets and people that are shaping how the earth's resources will be used in the century ahead.

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