New tariffs are not the answer to global climate challenges

As part of its recent Green Deal, the EU is planning to impose tariffs on those who do not meet its climate standards. The policy sounds logical—but it won’t work in practice

March 06, 2021
The Commissioner for the European Green Deal Frans Timmermans has indicated support for carbon border tariffs. Photo:  ALEXANDROS MICHAILIDIS / Alamy Stock Photo
The Commissioner for the European Green Deal Frans Timmermans has indicated support for carbon border tariffs. Photo: ALEXANDROS MICHAILIDIS / Alamy Stock Photo

Few policies could be more ill-designed to achieve their stated intentions than the proposal from the European Union to impose a Carbon Border Adjustment Mechanism. In plain language, the CBAM means tariffs would be put on a yet-to-be-defined mixture of imported products from countries which do not meet the standards and ambitions set under the new European Green Deal proposals.

The European Commission aims to avert the greatest dangers posed by climate change. That is a laudable objective, but the means of achieving it must be realistic. Bad policy could make the situation worse, and increase the risk that global emissions keep growing.

Europe leads the world in taking action to reduce emissions. The Green Deal, which contains strong commitments to electrifying sectors such as transport and developing a new clean energy source using hydrogen, will extend that lead. The Green Deal is supported by the promise of investment from EU and national sources of some €750bn over the next decade. It could seem logical for European politicians to want to ensure that investment in a cleaner, greener future does not force companies to relocate activity to countries where standards—and therefore the costs of doing business—are lower.  On this logic products being exported from countries not matching European standards would face a substantial tariff at the European border.

The problem with that argument is that the recent relocation of industrial activity away from Europe to emerging economies around the world has not been driven by the price of energy. Serious analysis published by the authoritative Brussels-based think tank Bruegel confirms that judgment. Relocation is driven by the attraction of new and growing markets for industrial products, from cars to steel to chemicals. Building capacity close to the new consumers in those countries makes perfect sense. Countries such as China and India, along with some of the smaller economies of Asia and Africa, are now driving forces in the global economy. 

The CBAM tariffs being proposed also ignore the simple arithmetic of greenhouse gas emissions. Europe now accounts for less than 10 per cent of global emissions. The UK accounts for only 1.5 per cent. Both those numbers will continue to fall—because of the continuing switch to lower carbon energy here, but also, and more importantly, because the share of global economic activity accounted for by China, India, and the rest of the world is rising every year. The frontier of the climate change challenge is not in Europe, but in Asia. On unchanged current policies, according to the International Energy Agency, European emissions will fall by almost 30 per cent over the next decade (that is before taking account of the Green Deal), while emissions in Asia will rise by 6 per cent.

In Asia the imperative is to encourage the shift away from coal, the source of more emissions than any other form of energy. In China, coal accounts for 60 per cent of all current energy use; in India, 44 per cent.

The Asian economy will only reduce its carbon impact through investment in new capital stock: less-polluting factories, steel plants, power stations and transport vehicles. European policy should be aimed at engaging with that process of modernisation, encouraging investment and the transfer of technology. Many European companies have much to offer and much to gain through participation in the process.

Tariffs will do nothing to advance modernisation. If they limit trade they will hold back economic growth, and leave countries such as India poorer, adding to problems caused by the Covid recession. Poverty and environmental progress do not go together.

The true, if undeclared, motive of the CBAM is protectionism. Europe is nervous that its industrial strength in the world is slipping away. The better solution, however, would be to restore Europe’s strength through the application and development of new technology—the key to America’s continued power—rather than trying to preserve uncompetitive businesses through tariffs. There is nothing to be gained from using the Green Deal to create the energy equivalent of the Common Agricultural Policy.

But all this is assuming that they work. And conversely, the second argument against tariffs as proposed by the European Commission and endorsed by MEPs two weeks ago is that they won’t. Europe does not have the capacity to inspect the complex supply chains involved in most traded goods, and will find it impossible to identify the carbon content of any particular products, such as ceramic goods or computers. Without the detail, any tariff would have to be imposed on the basis of generalised assumptions—about whole countries or sectors, penalising some manufacturers who are making great efforts to reduce their carbon impact.

The third and probably simplest argument is that a tariff-led approach will face push back in the real world. Trade barriers of any sort are met not by acquiescence but by retaliation. Does anyone in Brussels really think that countries such as China or India, or indeed the United States, will meekly accept tariffs being loaded on their exports? Or that Russia will accept tariffs which, if applied at effective levels, would cut off its gas exports? The risk is that the carbon border tariffs would trigger a damaging trade war, while achieving nothing.

Some in Brussels say that countries willing to commit themselves to achieving net zero by 2050 would be exempt. That too lacks credibility. The easiest thing in the world for any politician is to “commit” to a target 30 years away. Many have, but few have published detailed plans for meeting such grand ambitions. 

A greener, lower-carbon world can only be achieved through a common approach to a common challenge, and by shared technology capable of delivering low-cost, low-carbon solutions. The European Union should think again.