Should the EU tax imported products accordingly to their CO2 footprint?

container boat commerce business exchange import export taxation environment CO2 footprint
Numéro 1

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How does the EU tax CO2 footprint?
Currently, the European Union taxes internal production on CO2 footprint through a carbon market, officially known as the EU emissions trading system (ETS). This system, set up in 2005, is the biggest carbon market in the world. Today, 31 countries are part of this market (the EU, Lichtenstein, Norway and Iceland).

In practice, the EU sets a cap of maximum CO2 emissions for the internal market per year. Companies receive or buy emissions allowances, and they can trade these allowances if they decide that they do not fit their needs (firms can sell their allowances surplus to other firms). The cap is maximum CO2 emissions is reduced over time, to decrease progressively the CO2 emissions of the EU.

Source: European Commission

How does the EU tax imports?
The EU imports are managed by the European Union Customs Union (EUCU), which is an important part of the EU. This union abolished tariffs between the union’s members, and it set up a common external tariff for imports.

Today, the external tariffs depend on the type of the product imported, and it does not take into account the CO2 footprint of the product’s production and transportation.

Source: European Commission

Why do we talk about it today?
At the time of growing environmental challenges and climate change, many environmental activists are calling for favoring local products over imports because of the CO2 footprint linked to their production and transportation. Long distance trade was fostered by globalisation, and it starts to be strongly criticized today.
Numéro 2

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Pricing CO2 imports would be a win-win for the environment and the economy

Emil Dimanchev import product EU taxes environment

Emil Dimanchev

Senior Research Associate, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research

European manufacturers pay a carbon price, currently around 25 €/tCO2 for their emissions. Yet, competing foreign producers pay no such fees when they export to Europe, including those in countries lagging on climate policy.

While the EU prices local emissions, it leaves roughly two-thirds as much imported CO2 unpriced

Letting these polluters off the hook is a shortcoming of EU climate policy in two ways. First, it leaves a lot of emissions unregulated. A rough comparison will illustrate. Consider the production of metals, mineral products (such as cement), and energy fuels. These are some of the most CO2-intensive products but also among the ones that the EU can most feasibly tax at the border. To make such products for the EU market, foreign producers emitted 382 MtCO2 in 2015 according to the latest OECD data. In comparison, EU production of metals, mineral products, oil, and gas (producers exposed to EU’s carbon price) emitted 553 MtCO2 in 2015 according to Refinitiv Carbon Research data. So, while the EU prices local emissions, it leaves roughly two-thirds as much imported CO2 unpriced. 

Second, this policy leads to environmental, economic, and political challenges at home. To level the playing field between foreign and domestic producers, the EU gives the latter CO2 allowances for free. This work-around is a headache. It allows manufacturers to pass onto consumers the opportunity cost of holding allowances and thus earn windfall profits. It may sound theoretical but research has estimated some sectors to have reaped such undeserved profits. And those producers that do not pass on these CO2 costs eliminate the incentive their customers would have had to conserve or buy cleaner products, thus muting the intended effect of EU’s carbon price. Free allocation is a kludge at best and a polluter subsidy at worst. 

Free allowances have longer-term repercussions too. The EU has fewer and fewer to give as its CO2 cap declines. Companies thus often argue they do not get enough. They end up lobbying against strong climate policy, ultimately hindering European climate ambition, and leading to more work-arounds, like the Commission’s restriction on steel imports

The EU has fewer and fewer to give as its CO2 cap declines

Putting a CO2 price on imports is not only sensible but also legally feasible under WTO rules. It would help equalize the playing field, alleviating competitiveness concerns and providing political capital for stronger climate policy. It would end free allocation and its distortions. And it would bring more emissions under the fold of carbon pricing. No wonder it is a policy economists can actually agree on.


We should solve the challenges of global warming differently

Kai Weiss Unanimity rule taxation European Council

Kai Weiss

Research and Outreach Coordinator, Austrian Economics Center / Board Member, Friedrich A. v. Hayek Institute

The world will face monumental challenges due to climate change in the coming decades. European citizens increasingly want to see progress in its alleviation. In the wake of these crises, it is equally important, however, to stay cool-headed and not fall into apocalyptic panic. Policymakers must stick to the facts and weigh potential benefits of a policy with the drawbacks. Mass unemployment and the destruction of living standards are not necessary nor worthy sacrifices.

Such a “border tax” would precisely be what it sounds like: a tariff

The implementation of a carbon tax makes legitimate economic sense. Polluting our environment is the prototypical example of a market failure, and a carbon tax could internalize the costs of pollution that are not yet borne by the polluter. Despite this theoretical legitimacy we should also consider both the danger of government failure and the practical difficulties of such a tax. It is not clear at all how high such a tax should be, which climate model should be used as the basis, what the discount rate should be et al. These are never-ending debates that would have significant consequences on the height of a tax. And then there is the danger that politicians will quickly fancy this new revenue source too much, seeing it not as a way to internalize pollution, but as a good way to fill state coffers.

That politicians could instrumentalize climate change for their own purposes is a danger with a carbon border tax on the EU level, too. Such a “border tax” would precisely be what it sounds like: a tariff. In times of trade wars and protectionism, it would hardly be a good idea to implement even more trade barriers. Especially a carbon border tax would make it more difficult for developing countries to export their products to Europe because their capacities are often not sufficient for a green economy yet. Rather than preventing them from trading, we should be helping them prosper.

Rather than preventing countries from trading, we should be helping them prosper

In general, rather than advocating for even more interventions by governments and the EU when it comes to climate change, a fundamental rethink is needed. We will solve the challenges that global warming has in store for us. But this will not happen by some benevolent environmental elite. It will be entrepreneurs, innovators, philanthropists and creative heads – i.e., enviropreneurs. Providing them with the opportunity to flourish should be the goal, not to stand even more in their way.

What is your opinion now?

One thought on “Should the EU tax imported products accordingly to their CO2 footprint?

  1. Weiss’s argument is a stereotypical factless fearmongering. I do appreciate a strong factual argument against a hallowed reliance on ‘clean tech’. We need sound policy that directly address solving climate and pollution negative impacts while continuing g to drive progress in health peace and prosperity.

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