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How will the world respond to the European Union’s proposed carbon border tax?

Andy Uhler and Daniel Shin Jul 19, 2021
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Flags of the European Union member states hang inside the Council of the European Union's Lex building in Brussels. Dan Kitwood/Getty Images

How will the world respond to the European Union’s proposed carbon border tax?

Andy Uhler and Daniel Shin Jul 19, 2021
Heard on:
Flags of the European Union member states hang inside the Council of the European Union's Lex building in Brussels. Dan Kitwood/Getty Images
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The European Union laid out ambitious plans to fight climate change through a variety of economic measures, including a proposed carbon border tax that would levy fees on imports based on the levels of carbon they produce.

The United States has expressed concern about the EU’s plans to reduce carbon emissions by raising taxes and there are concerns about increased disputes within the World Trade Organization. But at the end of the day, it will likely have the longer-term effect of getting other nations to act in a similar matter, according to Columbia University professor of natural resource economics Scott Barrett.

“This does put pressure on other countries like the United States to step up,” Barrett said in a recent interview with “Marketplace Morning Report” host Andy Uhler. “And from that point of view, it’s a positive move.”

Barrett said that while the EU will likely see some trade retaliation going forward, Brussels’ latest move will force others to materially engage with climate change policies.

“I think it is really inevitable that any serious action on climate change is going to have to link with trade,” Barrett said. “It’s just finding the way to link trade and climate that is not disruptive to trade, does not damage relations among countries and does address the collective-action problem of getting countries to reduce their greenhouse gas emissions.”

Below is an edited transcript of Uhler and Barrett’s conversation.

Andy Uhler: I’m curious, from your perspective, this idea of implementing climate change initiatives, implementing sort of the idea that we have to face climate change and the realities, and putting them into things like trade deals. Is this novel? Is it a new idea? How did this come about?

Scott Barrett: The idea has been kicking around a long time. And it’s actually come up in the climate negotiations before but never carried further. The final output you see is all silent on this issue. But it has come up before. It appeared in U.S. legislation, the so-called Waxman-Markey bill incorporated an element of this very similar to the EU proposal. And Europe itself adopted something like this for one sector, for international aviation, some years ago. But that was never fully implemented. Or to put it differently, they backed off from it when there was a threat of retaliation by other countries.

Uhler: You know, the United States has come out and said, “Look, we don’t have a price for carbon, how are we going to do this?” Right? I mean, is there going to be pushback, just sort of inherently, when you have these sorts of things, I guess, traversing different platforms, right? You have trade deals, and then you have carbon?

Barrett: Well, I think there’s got to be a mixed response. I think on the one hand, you know, what Europe is trying to do is push the negotiations along. Its main interest is ensuring that its own industries don’t lose out from its more ambitious policy on climate. And also to make sure that emissions don’t relocate, which is a big worry about the trade system, that if Europe tightens up, other countries may take up the slack, as it were, and emit more. I think, however, there will be some issues. One is that this is being done unilaterally, I think that would be of concern to some. There are some other issues about WTO compatibility, but we won’t know how that would be resolved until a case, you know, comes to the WTO, if one does come. Probably the issues will be worked out in negotiations before that stage. But this does put pressure on other countries like the United States to step up. And from that point of view, it’s a positive move.

Barrett: One more thing, actually, I should say. You know, their concern is about something called leakage. So that’s this problem that if one country, a group of countries, acts, their own costs go up, therefore, they lose comparative advantage in the greenhouse-gas-intensive industries to the other countries. So that’s a real negative. But another aspect of this, which they can’t control through this measure, is that their demand for fossil fuels will shrink because of their ambition, that will actually lower world prices for fossil fuels and cause other countries, indirectly, to increase their emissions. And they’re not able to control for that.

Uhler: In terms of setting that price for carbon, you know, we talk about this all the time in international relations, right? The idea of, you don’t have a global governing body, you don’t have somebody saying, “Hey, this is how we do things.” You have sort of that idea of sovereignty. Is this just inherent in anything that we try to do? When we’re dealing with sort of common goods, the idea of the world attacking climate change, again, is inherently difficult, right?

Barrett: It’s inherently difficult. It’s actually probably the most difficult problem of its kind we’ve ever seen. And we’ve made repeated attempts to try to negotiate an effective agreement over 30 years, investing an enormous amount of diplomatic effort. And there’s not a lot to show for it. And the Paris Agreement is a voluntary agreement and so is relying on the different countries in the world to step up. And they’re really not doing that. This trade measure is not really getting at that directly. Its aim is just to neutralize the competitive effects. But a different way to think about this is actually to use trade as a means to enforce an agreement reached multilaterally to reduce emissions, in this case, probably just for the greenhouse-gas-intensive sectors. So I don’t know if this is how things are going to finally end up. But I think this, well, if you look at the history with the aviation directive, well, first their instinct was to retaliate. That’s sovereignty, they don’t want someone else to tell them what to do. But also it kind of kick-started some negotiations among countries on how to address this problem internationally. And it’s possible that that may also be an implication, or a final result, rather, of this unilateral effort by Europe and may actually just wake up other countries and get them to think more seriously about how they’re really going to attack this problem.

Uhler: There’s also — we’ve talked about this 100 times on “Marketplace” — but sort of the idea of a market opportunity here for countries if you get out in front. I mean, China has been pretty explicit about getting out in front of the idea of clean energy and renewables and things like that. There are economic benefits to being sort of the first out there, right?

Barrett: There are benefits, potentially, provided you get this transformation worldwide. So in other words, it has to be the case that the markets are changing everywhere, because then the countries that move early to develop the technologies will find markets. So you’re playing this delicate game where on the one hand, you’re trying to push out to urge the rest of the world to go. And you’re hoping you’re going to gain from that. But what happens if the rest of the world doesn’t join you? And that’s what’s been going on for about 30 years. This is partly what they’re trying to get at with this measure. But there are actually other ways in which they might push it even further. But that really should be handled much more at the multilateral level. So I think another implication of this is that we may need to rethink how we negotiate agreements like the Paris Agreement, to bring in measures like this, that are negotiated and therefore agreed by the different countries, but that really propel action globally to address this great threat.

Uhler: These are proposals, these certainly aren’t laws. You’re going to have cases in front of the WTO, I would imagine, arguments of protectionism. Do we have a timeline idea of how this sort of plays out? You talked about 30 years of dealing with this. I hope that’s not what we’re looking at.

Barrett: I don’t think it is. I think Europe is going to be moving forward with this. They have a lot to work out. They have their own internal negotiations to sort out. But I think they’re going to want to move forward with this. Now as they do, we’ll have to see how other countries respond as well. And as we did, we saw this played out before with the aviation directive. So this is basically the first shot across the bow. But I do think that no one can really accept the status quo ante because that’s been ineffective. And I think it is really inevitable that any serious action on climate change is going to have to link with trade. It’s just finding the way to link trade and climate that is not disruptive to trade, does not damage relations among countries and does address the collective-action problem of getting countries to reduce their greenhouse gas emissions.

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