George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Governments must accelerate carbon taxes as the pace of climate change increases

Countries which have committed to reducing their CO2 emissions face a problem: laws and regulations intended to clean up domestic manufacturing can leave their own industries vulnerable to cheaper imports from countries which permit environmentally more damaging processes. To resolve this problem and level the global net-zero playing field, some countries are beginning to consider the introduction of a carbon border tax which is levied on imports from dirtier jurisdictions.

When we reviewed this in April 2021, the EU was setting the pace with plans to introduce a carbon border adjustment mechanism (CBAM) before the COP26 climate change conference begins in Glasgow on 31 October. The EU published more details in July, making it clear that the CBAM will be phased in over three years from 1 January 2023. EU importers will be required to purchase carbon certificates corresponding to the carbon price which would have been paid if goods such as steel, cement and fertiliser had been produced under intra-EU rules. Despite criticisms that CBAM may amount to a form of protectionism, one of the broader aims is to encourage less environmentally damaging manufacturing processes around the world. If a non-EU producer has already paid a price for the carbon used in manufacturing the goods, the carbon cost can be fully deducted for the EU importer.

In pressing ahead with this, the EU seems to accept the risk that aspects of the CBAM may be challenged by the World Trade Organization (WTO). In this respect, the EU may find support from an unlikely quarter – the USA. While the USA is working on its own version of a carbon border tax and has already amassed considerable support from Democratic senators in Washington, it has made clear that it would not welcome implementation of CBAM until the USA is ready. Irrespective of views within the US, the Biden administration is pressuring China to reduce its emissions or face carbon border taxes. If that pressure is to have any credibility, the USA requires a reasonable level of confidence that it will not be blocked by the WTO.

Japan is also looking at carbon taxation, although it is not yet clear whether this will take the form of a carbon border tax, an emissions trading scheme or both.

For its part, the UK is now known to be considering the introduction of a carbon border tax. Trade Secretary Liz Truss has said that her first priority is to tackle the problem through the WTO. If agreement through the painfully slow international trading system is not forthcoming, UK legislation will then be considered. However, time may not be on the side of Ms Truss and Prime Minister Boris Johnson, who has repeatedly demonstrated his reluctance to make difficult decisions on green taxes. 

In a research paper published on 28 July an influential group of scientists warned that time has run out for further procrastination and greenwashing. With 18 of the Earth’s 31 vital signs damaged by climate change, and given the impacts we are seeing at roughly 1.25°C warming, the report’s authors call for massive-scale climate action. The climate emergency is not a stand-alone environmental problem. It is therefore important that attempted remedies do more than redistributing the pressure. Proposing a three-pronged near-term policy approach, the report calls for the global implementation of a significant carbon price.

Rapid and positive implementation by the USA, the EU, China, Japan and the UK would be a good start. However, while the USA may be preoccupied with China as a major polluter (these two countries are the biggest sources of fossil fuel CO2 emissions) it has to be recognised that carbon border taxes may hurt the smallest exporters in the poorest countries, as they may use the most carbon-intensive energy sources. In 2009, wealthier nations promised to contribute $100 billion annually to poorer countries for climate adjustment. Contributions made to date have fallen far short of that commitment. This is the time to make up the shortfall, slanting the funding towards green investment by small- and medium-sized enterprises in developing countries. 

 
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