A Preliminary Study on EU Carbon Tariff Policy

2021 06/09


"Carbon tariffs refer to tariffs imposed by importing countries on high energy consumption imported products such as cement, steel, aluminum, oil refining, paper making, glass, chemicals, and fertilizers, with the aim of raising the import costs of the aforementioned foreign products, in order to avoid the domestic industry of the importing country losing its price advantage due to the implementation of higher environmental standards.". The rationality and legitimacy of this policy have always been highly controversial. Currently, no country has officially imposed a carbon tariff, but the EU has proposed increasingly specific carbon tariff policy goals and plans, and is expected to start implementing them in 2023. The EU's approach is likely to be emulated by other developed countries, which will have a systematic impact on the global economic and trade situation, especially on China's exports of high energy consumption products such as steel and chemicals.

 

Developed countries led by the European Union advocate imposing carbon tariffs, the reason for which is that local enterprises have invested a large amount of funds to adopt carbon dioxide emission reduction measures, leading to a price disadvantage for relevant domestic industries. At the same time, it may force the production of such high energy consuming products to be transferred to other countries or regions that have not adopted carbon dioxide emission reduction measures, ultimately reducing or even offsetting the effects of local emission reduction policies (i.e., carbon leakage).

 

The impact of carbon tariffs on different industries and countries mainly depends on the carbon emission intensity of export products. The more carbon intensive industries, such as steel, cement, and aluminum, will have a more direct impact on their competitiveness in the markets of importing countries that implement carbon tariffs. Taking iron and steel products as an example, China uses blast furnaces and oxygen furnaces to make iron, which have lower production costs, but large carbon emissions. Each ton of steel produced will generate 2 tons of carbon dioxide; The United States releases only one ton of carbon dioxide per ton of steel produced. India, Türkiye and South Korea also have lower carbon emission intensity of steel products than China. [1] In this case, once the importing country begins to impose carbon tariffs, the applicable tax rates for China's steel products will be significantly higher than those of the United States, India, and other countries.

 

There has always been considerable controversy over whether carbon tariffs comply with WTO rules. Many countries, including China and Russia, believe that carbon tariffs violate the WTO's national treatment principle because most importing countries allocate their initial emission quotas for their domestic industries free of charge. In this case, the country's compulsory taxation of foreign products will result in domestic enterprises being treated better than foreign enterprises, which does not meet the requirements of WTO "national treatment". In addition, importing countries determine the carbon tariff rates applicable to products from different countries based on their own standards, which will lead to different treatment for similar products exported by WTO members, thereby violating the WTO's most favored nation treatment principle [2].

 

In response, developed countries such as the EU invoke the exception clause of Article 20 of the GATT to assert the legitimacy of carbon tariffs, on the grounds that the clause allows trade restrictions to be taken on environmental grounds in certain circumstances. The legality of carbon tariffs will be easier to assess after the importing country has introduced specific policies, but it can be determined that the formation and implementation of carbon tariffs will not stagnate due to doubts about their legality for a longer period of time in the future. At this stage, the focus of attention in developed countries is how to design a carbon tariff system without violating WTO rules (free trade), while calculating and pricing carbon emissions [3].

 

The EU carbon tariff policy has roughly undergone the following development processes:

 

In December 2019, the European Commission announced the "European Green Agreement", proposing to reduce greenhouse gas emissions in EU member countries by 50% in the next 10 years, and to make Europe the first "carbon neutral" region in the world by 2050 (i.e., zero net carbon dioxide emissions).

 

On March 10, 2021, the European Parliament passed the Resolution on the Carbon Border Adjustment Mechanism (CBAM), proposing to impose carbon tariffs on products from countries that cannot comply with carbon emission related regulations.

 

The proposal for a specific implementation mechanism for CBAM will be submitted to the European Parliament for consideration in June 2021, and is expected to be implemented from 2023.

 

The EU claims that the goals of "carbon tariffs" are: (1) limiting carbon leakage; (2) Preventing the decline of domestic industrial competitiveness; (3) Encourage foreign trading partners and foreign producers to adopt measures similar to those of the EU; (4) Obtain the benefits of carbon tariffs to finance clean technology innovation and infrastructure modernization, or use them for international climate finance. [4] On the other hand, similar to traditional anti-dumping and countervailing measures, the fundamental purpose of EU carbon tariffs is to weaken the price advantage of foreign products, improve the competitiveness of domestic industries, while obtaining high fiscal revenue and reducing trade deficits.

 

According to the EU Resolution on the Carbon Border Regulation Mechanism issued in March 2021, carbon tariffs are only applicable to high energy consumption products, including all imported products covered by the EU Emission Trading System (EU ETS); The industries involved include high energy consumption industries such as steel, cement, electrolytic aluminum, and electric power. The EU's carbon tariff policy ostensibly only targets some products and industries, without distinguishing between countries. However, the European Commission has the power to determine which countries have not made sufficient efforts to reduce carbon emissions and climate change during the implementation process, and then impose carbon tariffs on these countries.

 

Due to significant differences between China and the EU in carbon prices, free quotas, and calculation methods, if the EU does not recognize China's emission reduction measures and effects, it will result in higher carbon tariffs being imposed on Chinese enterprises. Relevant enterprises exporting to Europe should establish a compliance mechanism, closely follow up the EU carbon tariff policy, and adjust their environmental protection technologies and systems accordingly, introduce low-carbon production technologies recognized by the EU, and adopt carbon emission standards implemented by the EU for evaluation, accounting, and reporting, in order to effectively address the upcoming carbon tariff barriers.

 

(This article is translated by software translator for reference only.)

 

References

 

[1]Boston Consulting Group,How an EU Carbon Border Tax Could Jolt World Trade,June 30,2020,available from: https://www.bcg.com/publications/2020/how-an-eu-carbon-border-tax-could-jolt-world-trade (accessed on 4 June 2021)Michael A.

 

[2]Mehling,Harro van Asselt,Kasturi Das,Susanne Droege,and Cleo Verkuijl,Designing Border Carbon Adjustments for Enhanced Climate Action,American Journal of International Law,Cambridge Core,11 July 2019,available from: https://www.cambridge.org/core/journals/american-journal-of-international-law/article/designing-border-carbon-adjustments-for-enhanced-climate-action/BF4266550F09E5E4A7479E09C047B984 (accessed on 4 June 2021)

 

[3] Anbang Consulting, "Carbon Tariff: The" Pusher "of the New Round of Global Trade War?", April 12, 2021, from: https://new.qq.com/omn/20210412/20210412A08V0A00.html

 

[4]Robert Ireland,The EU Carbon Border Adjustment Mechanism:An Update-Regulating for Globalization,January 11,2021,available from: http://regulatingforglobalization.com/2021/01/11/the-eu-carbon-border-adjustment-mechanism-an-update/