Don’t Add Carbon Tariffs to the Growing List of Global Trade Tensions

Don’t Add Carbon Tariffs to the Growing List of Global Trade Tensions
(Adrian Dennis/Pool via AP)
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Can nations square their trade priorities with their climate ambitions? As adversaries and allies alike bicker over a host of major and minor trade issues, there are concerns that climate issues will be added to the list. The trade-related impact of climate proposals is shaping up to be a potential stumbling block going into the global international climate summit set to take place in Glasgow, Scotland, in November. The 26th Conference of Parties (COP), which has already been delayed a year due to the pandemic, is considered the last best chance for major global economies to solidify and strengthen their national climate contributions. A recent report by the Information Technology and Innovation (ITIF) argues that allies and partners like the United States, the EU, the United Kingdom, and Canada should avoid destabilizing trade frictions that threaten to derail much-needed climate progress and instead work toward a collaborative climate innovation club.

The EU’s contribution to the global trade friction miasma was their much-maligned carbon border adjustment mechanism (CBAM), a carbon tax on imported industrial products including aluminum, cement, steel, fertilizer, and electricity. International reaction was sharply critical after the European Commission released a draft policy proposal as a part of its “Fit for 55” plan, the EU’s post-pandemic environmental and energy policy package. U.S. climate envoy John Kerry noted that “it’s premature to be discussing whether or not you ought to unilaterally go off and do a CBAM,” while China’s foreign minister said that “it is essentially a unilateral measure to extend the climate change issue to the trade sectors.” Negative reactions from international partners illustrate that while carbon tariffs might be attractive in theory, they are largely unworkable in practice.

Take the example of accurately counting the amount of carbon embodied in a particular exported good, such as steel. To avoid punitive carbon tariffs, steel importers would have to provide detailed and verifiable data on the energy intensity of fuels and electricity used in the manufacturing process. They would need to trace emissions up and down the life cycle of the product from raw inputs to production to finishing and shipping. Foreign producers and importers to the EU will have to spend countless hours navigating EU red tape and bureaucracy to verify their products’ emissions intensity. And with volatile carbon prices in the EU, which have more than doubled in the past year, it will be difficult for importers to have cost certainty as to their true liability under the system going forward. Using a national average that treats all firms and plants equally diminishes product innovation incentives for lower carbon processes.

A system through which individual producers can prove their lower carbon intensity will undoubtedly add complexity, confusion, and fears of favoritism and miscalculation on the part of accounting authorities. A carbon tariff would dampen much-needed clean tech research, development, and deployment in hard-to-abate industrial sectors. That’s because in industries such as iron, steel, and cement, where the marginal cost of abatement is very high, a CBAM tariff would increase the market price and shut out competitors. Demand would decline, but emissions per unit would change very little. All this would have the effect of stymieing climate innovation while not providing the necessary incentives to spur investment in technologies that reduce emissions in these hard-to-abate sectors.

Trade and innovation go hand-in-hand. With increased trade come greater opportunities to achieve economies of scale and earn revenue to develop new products. In our world of globalized trade, there is a real risk of putting national industry at a global disadvantage because of the increased cost of doing business to comply with increasingly ambitious climate and energy policies. That’s why ITIF recommends a climate innovation club approach as an alternative to national carbon tariffs. A voluntary multi-national club-based system that respects diverse national interests and policies while fostering cooperation and engagement amongst club members is preferable. A club can lower trade tensions amongst climate allies and friends such as the EU, while supporting cleantech innovation and deployment and keeping out dirty players like China. We can’t let trade tensions derail the overarching need to build agreements and cooperation that support climate-sensitive/friendly trade. The next few months will be critical to determining how nations respond to the growing need to strengthen climate agreements while avoiding approaches that inevitably create new and problematic trade issues.

 

David M. Hart is director of the Center for Clean Energy Innovation at the Information Technology and Innovation Foundation (ITIF).
Stefan Koester is a senior policy analyst at ITIF.


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