Encouraged by the Biden administration’s $3.5 trillion green plans — yet to be passed — Brussels’ EU bureaucracy is pursuing its own drastic de-carbonization plan — also yet to be passed. It controversially features tariffs on the imputed CO2 content of imports to the EU.
The July 12th to July 18th, 2021 roundup of major trade developments, with L.C.
As anticipated, the European Commission unveiled on Bastille Day a humongous package of thirteen climate policies under the collective name, “Fit for 55.” According to the EC’s announcement, “Today, the European Commission adopted a package of proposals to make the EU’s climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.”
The title “Fit for 55” moniker is being widely ridiculed. PoliticoEurope wonders whether the name would have been a better fit “for a suburban yoga studio” and mockingly headlines its coverage, “‘Horny for 40,’ ‘Fit for 55’ — EU’s climate plan branding raises eyebrows.”
Meanwhile, many scientists dispute the existence of a scientific basis for the billions and trillions of dollars and euros that the Biden and EU administration’s are spending to reduce CO2.
Although systematic coverage of all of Fit for 55’s component parts is conspicuously missing from the EU site, one controversial policy document is available for scrutiny. It’s titled, “Proposal for a Regulation of the European Parliament and of the Council Establishing a Carbon Border Adjustment Mechanism,” or CBAM for short, and it’s a 291-page door-stopper with dense text and numerous charts and tables.
EU Commission sets another goal it won’t meet
The goal of CBAM is to drastically cut carbon dioxide emissions by at least 55% below 1990 levels by 2030, aiming for net zero emissions by 2050, including emissions-free vehicles. It would be the first-ever carbon border tariff. This has broad implications for trade policy. There is already a contentious debate over its WTO compatibility. There is also much skepticism about the feasibility of reaching the emissions-cut goal CBAM sets and the political prospects for enacting the plan. Having been proposed by the European Commission, after quite a bit of internal disagreement, CBAM and Fit for 55 as a whole now have to be approved by the European Parliament and EU member countries.
One of the package’s largest proposed changes is inclusion of road transport, shipping, construction, vehicle fuel, and heating in the EU’s existing carbon cap and trade Emissions Trading System, the ETS. That’s particularly controversial because it hits consumers directly rather than price hikes being concealed by being channeled through manufacturers and other corporations.
Another particularly controversial aspect – the one receiving the most attention this week – is the part directly related to trade – the CBAM. Because the EU is rendering some of its own industry less competitive by imposing emissions taxes and caps (part of the ETS), the EU is concerned about “leakage” of business from the EU to other countries that produce the same goods with less regulatory burden, by not being subject to “carbon” restrictions. These companies outside the EU would then be able to sell more to the European market since their price would be lower than EU manufacturers. Not only would that hurt EU business economically and be politically dangerous to the EU elite but it would also not lead to the EU Commission-desired cut in global emissions.
Xi Jinping finally right on something
The CBAM border tariff on all imports containing what the Brussels bureaucrats believe contain untaxed carbon content has already been denounced by some countries as unacceptable, including Xi Jinping’s China.
To try to overcome opposition to its démarche, the CBAM will be phased in. According to Commission plans, it would take full effect in 2026. It sets an array of new rules and requirements and standards, affecting most aspects of the economy. Though the EU accounts for only about 8% of global greenhouse gas emissions, the EU vice president in charge of climate, Frans Timmermans, declared of the plan, “We do it to give humanity a fighting chance.”
Brussels hopes to set a course that others will follow at this year’s UN’s “COP 26” climate conference in Glasgow, November 1st to 12th. The conference rivals in duration (12 days) the length (291 pages) of the EU’s CBAM proposal.
Substituting pain for prosperity
Timmermans also told reporters that the plan will bring “pain” and that he expects the initial sticking point to be expansion of ETS to cover heating and vehicle fuel, issues that already sparked heated discussion within the Commission. The sectors to be initially hit by the CBAM are iron and steel, aluminum, cement, fertilizers, and electricity. These come from countries that don’t impose domestic measures to curb CO2 emissions in these sectors. Thus, commodities rather than finished goods are the EU initial targets, perhaps because their impact on the consumer (=voter) will be diluted as the raw materials pass through each production step. Two of the countries that will be badly hurt by the EU carbon tariffs are the Ukraine and Turkey, both on the front-line of opposition to Russia.
These sectors were chosen, the EU Commission explains, based on “their carbon intensity, their trade intensity, and the availability of necessary reference data to apply” a border tariff. Determining how much carbon is embedded in a product is not a rigorous and precise calculation, but rather one that could easily be questioned — a fact relevant to WTO compatibility.
Raising prices and increasing bureaucracy
Importers of the targeted products will be required to buy a certificate from the EU’s CBAM authority, priced according to the current price for carbon emissions allowances in the ETS cap and trade program. Those prices have soared this year. Imports from countries that have their own carbon tax can deduct the amount of that tax from the tariff.
Needless to say, there will be complications arising from the difficulty of figuring out what the tariff should be, what exemptions might apply, which foreign measures are eligible for deduction, and how much to deduct if an exporter already paid a carbon tax. There will be loopholes and work-arounds that foreign countries and European importers will find, making the system appear less effective and less fair. Moreover, if EU trading partners don’t think the CBAM is fair, they are likely to retaliate — with or without first complaining to the WTO – a further complication.
Donald, you’ve met your trade match
Might we suggest that in CBAM the EU Commission has hit upon a formula that could provoke an international trade war that will make Donald Trump, in retrospect, seem like a Davos globalist?
If enacted, the pain inflicted by CBAM will be considerable, falling especially on poor citizens within the EU and poor countries outside it. But lo! — the masters of the Brussels universe have added a provision for some of the money raised by the tariff to subsidize low-income households’ energy and other bills. But manufacturing, construction, real estate, and some services will suffer, and there is expected to be strong opposition among many within the bloc, perhaps pacified though some sort of compensation for the poorer EU countries.
European industry – except for those directly competing with the targeted imports – will likely resist the CBAM and other parts of “Fit for 55.”
The French again
Statist France reportedly pushed hardest for the CBAM, which helps explain the Bastille Day rollout. President Emmanuel Macron was tasked with overseeing finalization of the plan. Perhaps he needs a refresher course from the gilets jaunes. France was also a leading proponent of the Digital Services Tax, which in the hands of the OECD and a compliant Biden administration has led to a global corporate 15% tax cartel and abdication of US sovereignty. EU governments will be shaping their version while Parliament works on its. Then they will all work together to finalize.
The Italians are wary of the increased bureaucracy the plan entails (they are trying to cut their own excessive bureaucracy), the Poles are worried they won’t get the promised compensation, and all fear that domestic constituents will revolt. This is something that many EU governments have recently already faced over issues like higher fuel prices and EU infringement of sovereignty.
Other repercussions
While the EFTA and EEA countries – Switzerland, Liechtenstein, Norway, Iceland – are automatically exempt from the CBAM, the UK is not. This could either provoke anti-Brexit forces angry that UK exports will be subject to new tariffs or please pro-Brexit forces glad the UK doesn’t have to follow the EU in imposing the tariffs. However, London is itself far along in crafting its own “decarbonization strategy,” with emissions caps and a price on carbon allowances. So it may ultimately be exempt from the CBAM.
The US, on the other hand, isn’t poised to enact a carbon tax, though Senate Democrats have included a carbon tariff (“polluter import fee”) among other climate actions in their proposed three trillion dollar budget and spending plan also unveiled Bastille Day, July 14th. Details, however, were lacking.
The carbon tariff idea remains highly contentious in Washington, but Democrats need it to pay for their aggressive spending plans. Yet most think the US is not likely to enact a carbon tariff, certainly not soon, since it really couldn’t do so unless it has a domestic carbon tax and carbon market. Proposals for such have gone nowhere in Washington.
Is the EU making nice to the US for now?
Although some US officials, led by climate envoy John Kerry and Treasury Secretary Janet Yellen, recently had somewhat encouraging things to say about the EU’s plan, it is not generally welcomed by political players in the US. Senate Finance Committee Chairman Ron Wyden (D-OR) said this week, “I will make sure… that no carbon policy hits working people and working families.”
Some even speculate that the CBAM could lead to US counter-tariffs and a new escalation of US-EU trade tensions. However, the goods initially targeted for the new tariffs are not products the US exports significantly to Europe. While goods higher up the value chain may be brought into the system in the future, that’s a long way off. There is also speculation that Brussels deliberately chose initial products that wouldn’t impact the US.
Economist Joseph Stiglitz – who, like Yellen, is sympathetic to the goal of the tariffs – warned that carbon taxes/tariffs would hike prices of things made with carbon – a huge share of the global economy. This could cause a disruption provoking a financial crisis more severe than 2008. He nonetheless endorses the idea of a carbon tariff, saying he thinks the technical issues with it can be addressed.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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