Carbon border tax & the risk of trade disputes

August 10, 2021 | Daniel Kiselbach, Satinder Bains, Noah Robinson-Dunning

The European Union announced a series of ambitious plans that has been dubbed as the “European Green Deal.” The goal will be to move Europe and its economy away from fossil fuels over the next nine years and to reduce emissions by at least 55% compared to 1990 levels. The potentially most contentious of these plans involves a proposal to impose tariffs on certain imports from countries with more relaxed climate-protection rules and regulations. This proposal, according to the European Commission, is required to address climate change. However, these new tariffs may result in global trade disputes.

The goods having the greatest tax implications will likely be goods from Russia and Turkey, mainly raw materials such as iron, steel and aluminum. Even some U.S. exports to Europe will be impacted by this tax proposal. Some speculate that the carbon border tax could create new diplomatic fault lines ahead of the COP-26 (the UN Climate Change Conference), which will be held by Britain in Glasgow in November 2021. At these talks, the focus will be on China and the U.S., as these two countries currently produce the largest share of greenhouse gases.

Central to this European proposal is the increased prices for carbon, and it’s not only imported goods made outside of the European Union that will be taxed. Nearly every sector of the European economy will be required to pay for the emissions that it produces. However, the methods and means for calculating the carbon content of imports is unclear.  To protect their market shares, EU firms will likely lobby for the highest possible tariffs.

While these proposals out of Europe are the first of its kind, the U.S. Federal Government has also expressed interest in raising the bar in its efforts to address climate change. A White House official stated that they were reviewing the European Commission’s proposals and would broadly welcome the idea of a carbon border tax. Democratic members of Congress even took a preliminary step toward a similar border tax, which they have called a “polluter import fee” also intended to reduce emissions. The U.S. has promised to reduce emissions by 40 to 43% by 2030. Scientists have said that the world needs to halve emissions by then, which would require history’s biggest polluters, namely the U.S. and Europe, to make the sharpest, swiftest cuts.

Overall, only time will tell what these proposed tariffs will mean for global trade. While the European Commission has expressed hope that these taxes will pave the way for a greater shift away from fossil fuels and pollution on an international level, there is a real possibility for global trade disputes to arise at the World Trade Organization when countries are being targeted based on their environmental rules.

The complete proposed laws can be found online.

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