Europe’s new carbon tariff will not help the climate | Popgen Tech
Many within the European Union are likely to see its new carbon cap adjustment mechanism as an enormous step forward in the fight against climate change and for the EU’s own global standing. And it is true that the EU achieved internal consensus – always a difficult process – surprisingly quickly. In the process, it decisively shifted the debate on trade and the environment in the 21st century.
Yet countries in the global south have a clearer view of what the new tariffs will mean. It doesn’t look like a big win for the climate – or for the EU’s reputation.
The problem is not only that companies in some sectors – including steel, cement and fertilizers – will now have to pay a tariff at the EU border based on the amount of carbon used to make their products. A potentially bigger issue is that, in order to work out what they owe, they will have to comply with paperwork requirements at the level required for EU companies. High compliance costs effectively represent an additional, unspoken tariff.
When those secondary costs are taken into account, European companies and those in the global north that are already part of emissions trading schemes or in jurisdictions with greater administrative efficiency will have a clear competitive advantage in the European market. Countries in the global south that do not have truly granular emissions data – which are required for accurate, producer-specific certification – will be at a major disadvantage.
That it is unfair is not surprising. Most restrictions on trade cause injustice of some kind. Yet the scale of the potential transfer from poor to rich is shocking: one academic analysis estimated that “the welfare gains in selected developed countries [from a full-spectrum CBAM] amounts to $141 billion, and the annual welfare loss in developing countries amounts to $106 billion” per year. How can the EU talk about “climate justice,” given such numbers?
What should further worry EU activists is the likelihood that the new mechanism could slow down rather than boost global decarbonisation efforts.
The EU argues that the new tariffs will simply prevent “carbon leakage”. Without them, companies engaged in cheaper, high-carbon production may have an edge over those that have invested in reducing their carbon footprints.
In fact, it is more likely that the new European mechanism will create two separate supply chains: one between countries that already boast emissions trading schemes and EU-level administrative capacity, and a much dirtier one between poorer nations. One will serve high-income countries and one the rest of the world.
Rather than decarbonizing, companies in the global south will have every incentive to focus on the latter group of nations. These are precisely the regions where, over the next decade, most concrete will be poured and steel will be used. Indeed, the largest growth in potential emissions over the next decade will come from production and consumption in the global south.
If the new European mechanism works as intended and encouraged all companies to decarbonize, those emissions could be reduced. In reality, developing world companies are likely to emit as much carbon as they otherwise would have, having given up on meeting unrealistic European standards.
The idea of carbon cap adjustments can still be saved. Some have called for the revenue generated from border tariffs to be used to support decarbonisation in the global south. A “Global Climate Alliance” recently proposed at COP27 focused on finding credible ways to incentivize decarbonisation by sharing the revenue from carbon taxes. Unfortunately, the European Parliament has already happily spent some of that money bribing some of the EU’s eastern members to agree to the European Green Deal.
A workable climate alliance could build on the G-7’s “climate club” idea by offering differential treatment to its members. Such efforts should include the creation of regional or country-specific pathways for compliance with Europe’s new rules. For example, lower verification requirements could be imposed on exporters from Bangladesh, along with a less stringent carbon tariff than that imposed on exporters from China or the United States.
Either way, European policymakers cannot assume that the imposition of this new tariff is the end of the road. If they care about the global fight against climate change, they will need to make sure they understand the long-term effects such unilateral measures have on other countries’ efforts to decarbonize. And if Europe values its global reputation, it must find ways to help those nations comply with its rules.
Mihir Sharma is a Bloomberg opinion columnist. A senior fellow at the Observer Research Foundation in New Delhi, he is author of “Restart: The Last Chance for the Indian Economy.” @mihirssharma
Disclaimer: This article first appeared on Bloombergand is published by special syndication arrangement.