Sheena McGuinness

Written by: Sheena McGuinness

Sheena McGuinness

Partner

Carbon Border Tax – protectionism or protecting the world?

There is no single answer to how we reduce our carbon footprint and the role that governments should play in this. The European Parliament has overwhelmingly endorsed the creation of a CBAM. This will raise revenues to fund the “green transition” and protect European companies from non-European competitors which use fiscally cheaper but environmentally more damaging manufacturing processes outside the EU’s Emissions Trading Scheme (ETS). 

The ETS put EU power generators and businesses operating in energy-intensive sectors at a disadvantage when compared to their non-EU counterparts who do not have to pay a similar levy – the so called ‘carbon leakage’. Enter the CBAM, a form of CBT, to level the global net-zero playing field.

A CBT is a tax on carbon emissions attributed to imported goods that have not been taxed at source and so put EU manufacturers at a cost disadvantage versus overseas competitors where climate change regulations may be less strict. 

What could the EU proposal mean politically? While taxing carbon where emissions are generated may be a straightforward concept, it is a difficult one to implement. Notably, China’s continuing reliance on non-renewable energy to power its economy leaves it particularly exposed. John Kerry, US President Joe Biden’s climate envoy, argues that a CBAM should be deployed only as a last resort, urging the EU to wait until after the COP26 climate change conference in November. Kerry raised concerns that the EU’s carbon tariff proposals could have a disastrous impact on international trade and relations. It is easy to see why. Among other things, it is not clear how the EU’s CBAM proposal would be consistent with World Trade Organisation (WTO) rules and particularly the “most favoured nation” obligations which specifically outlaw discrimination among countries.

Despite the good intentions which underpin the CBAM proposal it may become ensnared in the political agenda, specifically accusations of trade protectionism. Whilst protectionism is not new, the broad scope of CBAM sets it apart from its predecessors. It is entirely conceivable that disadvantaged nations such as China could counter the introduction of the CBAM with the imposition of other tariffs. Alternatively, the US or the UK might want their piece of the green tax pie, introducing their own CBTs to stem their own carbon tax gaps. 

Carbon emissions and the challenges facing policy-makers will shake up perceptions of what is responsible, appropriate, proportionate and pragmatic in any tax measure to reduce emissions on a global scale. As initial reactions from various political figures make clear, the CBAM raises issues which extend far beyond well-intentioned objectives of reducing emissions. Amidst allegations of unfairness, the roles and responsibilities of domestic governments and the European Parliament will be scrutinised in the course of developing solutions to the global climate emergency. 

While CBAM may be a well-meaning attempt to reduce carbon emissions worldwide, it could lead to far reaching repercussions in the form of international levies which in turn could impact economies and the movement of goods cross-border. With more time, wider international support could be forthcoming. Time, however, is in short supply as the climate emergency bears down on the world.

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