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  • Advanced nations are moving to introduce carbon tariffs, which might affect the global trading rules
    2021-11-11 hit 504

    Advanced nations are moving to introduce carbon tariffs, which might affect the global trading rules


    The US and the EU are designing plans to introduce carbon tariffs

    Carbon tariffs can be “protectionism in disguise” as nations implement carbon tariffs in their country’s interest

    Economists say, “Carbon tariffs can result in a totally different outcome from what we have expected.”

     

     

    The United States and the EU and other advanced nations are showing a move to impose trade tariffs to reduce carbon emissions. This will favor steel, chemical product and cement manufacturers from countries emitting less greenhouse gases by providing tariff benefits for such companies. The Wall Street Journal reported in an article published on November 2 (local time) that such a move will undermine the existing global trading rules and trigger trade disputes.

     

    The Wall Street Journal named imposing a trade tariff on carbon emissions as an experiment on climate change by advanced nations, including the United States and the EU, and said it has the potential of completely changing the rules of global trade. The United States and the EU signed a trade agreement aimed at resolving disputes over steel and aluminum tariffs on October 31st. Joe Biden, the President of the United States, commented on the agreement by saying, “We should limit dirty steel produced by China from accessing the market and stand up to nations that harmed our environment by dumping steel to our market.”

     

    Both the United States and the EU are planning to suppress imports of particular types of steel that are produced by employing methods linked to high carbon emissions. The two sides also decided to co-develop a methodology that can gauge carbon emissions associated with steel and aluminum produced for exporting purposes and also agreed to share relevant information. Carbon tariff, also referred to as border-adjustment tax, is a system to prevent disadvantages to its own national economy by ultimately implementing schemes to limit carbon emissions.

     

    Nations imposing carbon tax or other restrictions on steel producing companies will see price competitiveness of their steel diminish as steel produced by these companies will be much more expensive. This applies when both importing and exporting such steel. It is a system to prevent steel buyers from opting to importing cheaper steel produced by emitting greater amount of carbon or to suppress steel producers from offshoring production facilities to nations with fewer restrictions.

     

    The Wall Street Journal indicated the risk accompanied with carbon tariffs is akin to that of the risk triggered by trade barriers. It analyzed that carbon tariffs will increase production costs and the steel price itself, thereby not only negatively affecting companies that require steel in performing their business but also consumers as well. The paper also projected that carbon tariffs can undermine the global trade order and trigger trade disputes, citing that some countries labeled carbon tax as “protectionism in disguise.”

     

    According to KGM & Associates, a consulting firm specializing in economy and environment, and the report from Global Efficiency Intelligence published in 2018, a quarter of global greenhouse gases are being produced by production activities that are offshored to other countries.

     

    The report stated that claims made by advanced nations on reduction of carbon emissions are, in fact, the result of advanced nations outsourcing carbon-emitting production activities to developing nations. The EU took the lead in introducing carbon tariffs as it released a proposal to do so in July. This resulted European companies to be subject to emission trading system, which means these companies need to pay should they need to emit carbon exceeding the authorized cap set for respective companies. Currently carbon price in the region is set at 60 Euros/1t.

     

    The EU is planning to introduce a fee to producers outside of the EU region, which is similar to a fee imposed on European companies depending on the carbon intensity of products sold in the EU. This fee will be initially applied to steel, aluminum, cement and fertilizers that are high in carbon intensity. The EU is hoping to implement this scheme in 2025 with an aim to reduce carbon emission by 55% by 2030.

     

    A report published by the Boston Consulting Group anticipated that steel produced in China and Ukraine will see their market share diminished by Canadian and Korean steel, once the EU introduces their carbon tariff program. The United States has seen more than a dozen legislations on reducing carbon emissions proposed to the Congress by both Democrat and Republican parliamentarians since 2015. These legislations are all related to imposing carbon tax on products sold inside the United States that is similar to carbon tariffs.

     

    Scott Peters, a member of the Democratic Party, who is serving as the U.S. Representative from California’s 52nd congressional district, introduced a carbon tariff legislation said, “European countries and Canada are aggressively working to introducing carbon tariffs” and added, “The last thing we want is witnessing American companies losing competitiveness.” American companies have made large investments and utilized advanced technologies over the last couple of years to reduce carbon emissions in response to restrictions related to protecting the environment.

     

    The Climate Leadership Council revealed that American-made metal goods, chemical products, electronic products and automobiles are produced by employing methods that produce 40% less carbon compared to the global average. This leads to projections that the American steel industry will be the greatest beneficiary of introducing carbon tariffs. American steelmakers produce steel by recycling scrap metal, which is a departure from the method used by Asian steelmakers that typically produce steel by changing the properties of new steel to produce reinforced steel. The Wall Street Journal explains the method used by American steelmakers is highly effective, resulting in 50% to 100% less carbon emissions.

     

    Some trade experts expressed skepticism over carbon tariffs as it can fail to reduce the overall global carbon emissions. European aluminum makers are concerned that China can fend off EU’s carbon tariffs by merely producing a dedicated portion of its aluminum for sale in the EU by using hydropower, which only amounts to 10% of its total aluminum production, and producing the rest of aluminum for sale in the Asian market by using coal-powered energy.

     

    Rusal PLC, a Russian aluminum maker, released a plan to establish an affiliated energy company dedicated to producing aluminum in Europe and a plan for the existing company to focus on producing aluminum only for domestic use. This indicates carbon tariffs can be exploited as potential channels of protectionism as respective governments design their carbon tariffs to give advantage to domestic industries, rather than providing a level playing field for fair competition.

     

    Also, rather than blocking competition in imports, the global trade order allows that carbon tariffs can be exploited as a tool to impose the same amount of costs domestic producers are required to pay to foreign companies as well. Markus Zimmer, a Senior ESG Economist at Allianz SE, mentioned, “Carbon tariff is a flawless tool as from the viewpoint of an economic principle, but unfortunately we are not living in a world governed by economic principles” and warned, “The introduction of carbon tariffs can produce totally different outcomes than those initially expected.”

     

    [This news is provided by Newsis]

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