EU Climate Action: An Opportunity for US Competitiveness
European Union leaders just raised their game by confirming their intent to develop a carbon border tax to be in place by Jan. 1, 2023. A new element in the EU’s response to climate change, this is a significant development in its efforts to reduce greenhouse gas emissions. Although few details about the policy are known, the tax will likely make foreign producers as responsible as its own for meeting Europe’s environmental ambition. The U.S. can—and should—join its allies across the Atlantic in this crucial endeavor.
The U.S. has a choice. We can continue to play checkers in the game of global competitiveness: either escalating the trade wars that have harmed American businesses and consumers, or respond with shrugging indifference to European greening. Or we could play chess.
The EU has a mature cap-and-trade system and ambitious targets for clean energy and electric cars. In the face of the COVID-19 pandemic, European leaders are doubling down on their intentions to foster a green recovery. But European leaders are also aware of the risks of moving too quickly and of imposing too steep a cost on citizens. When the “Yellow Vest” protests of 2018 pitted climate actions against the working class, Europe’s leaders took note.
By raising a border tax on carbon, they will be able to argue that the governments’ climate ambitions will not see jobs transported abroad. They can promise a market for green economy products–one that will start in Europe and flourish around the world as consumer preferences change and governments implement climate policies.
It would be a mistake to use the European carbon border tax as an excuse to escalate trade tensions and raise broad retaliatory tariffs on European products. When a government has an internal carbon pricing policy (as Europe does) certain import taxes on the carbon emissions from foreign goods are more tax policy than protectionism. They ensure that goods consumed within EU countries experience a carbon price, no matter their place of manufacture.
This keeps companies from offshoring production out of Europe and taking their emissions with them. Such adjustments are commonly used in other tax regimes and can comply with WTO rules on trade. Competitiveness is only affected insofar as countries or firms have particularly good, or bad, emissions profiles.
A tepid response to the EU carbon tax on imported goods would be a missed opportunity for the U.S. The EU and the U.S. could lead a joint effort to create a large market for cleaner goods, lean into our competitive assets, and work against the continued dominance of cheap goods manufactured abroad, mostly in China, without concern for environmental impact.
To do that, the U.S. should adopt the EU’s stance toward a border adjustment for carbon, with a corresponding national carbon price. Such a carbon price can be matched with tax cuts for workers to lower income taxes, spur economic growth, and increase total employment. Working alongside the EU, we could create a border mechanism to achieve parity with the EU’s and protect American manufacturing from unfair competition from carbon-intensive foreign goods.
Combined, the EU and the U.S. have more than double the GDP of China. That much market power, covered by carbon prices and maintained by border adjustments, will change the game for global competitiveness. The Boston Consulting Group reports that under an EU border adjustment for carbon, the U.S. “could emerge as the most carbon-friendly producer” for European manufacturers. This is because steel mills in the U.S. are twice as carbon efficient as their Chinese competitors.
According to the same report, Russian oil and gas would be less competitive than U.S. and Saudi Arabian oil and gas because of the higher emissions intensity of production in Russia. Russian businesses are already squirming at the prospect of the EU border adjustment. Creating markets for clean products will improve the competitiveness of our supplies and incentivize firms in foreign countries to clean up their act.
It might be tempting to see a European carbon border tax as yet another barrier to U.S. manufacturers and producers. But the reality is just the opposite. The more seriously the world regards the reduction of greenhouse gases, the better our industries will look compared to the competition. The EU’s latest decision demonstrates the opportunity we have at our disposal. All we have to do is look a couple of steps ahead towards a prosperous and clean future, and make the necessary moves to get there.
Alex Flint is the executive director of the Alliance for Market Solutions.
Joseph Majkut is the director of climate policy at the Niskanen Center.