Carbon border tax would be a climate change ‘persuader’

Common feature of all proposals is a substantial tax on emissions from fossil fuels

John FitzGerald

Climate change is a policy challenge unlike most others, because success will require a global effort in a sphere which will bring significant upfront costs for each economy. And, although the world will benefit in the future from concerted policy initiatives, to date that hasn’t been enough to generate combined action on the scale required.

A continuing refrain from those opposed to taking painful action today is that domestic action will be largely offset by international inaction. If the EU takes urgent measures, a water-bed effect could see the reduction in emissions in the EU being countered by a rise in emissions elsewhere.

There is some validity to this concern. The first task of global policymakers is to try and convince the bulk of the world economy to act, leaving few free riders. Alternatively, there is a need to develop policies to allow some economies, such as the EU, to move faster on tackling climate change, without favouring laggards.

At the upcoming UN climate conference in Glasgow in November, the task of getting greater buy-in to action will not be easy to achieve.

At the Climate Dialogues conference in Dublin this week, Prof Biying Yu of the Beijing Institute of Technology presented results from her modelling which showed that most economies in the world would be better off in the long run by taking action on climate change, as the harm from global warming would greatly offset the costs of action.

However, while policymakers may be convinced of this result, it will be challenging to build public support for difficult measures which will only fully pay off decades hence. While China may be able to think strategically in these terms, that is not true in most other major economies, and for democratic rather than command systems of government.

One approach suggested by the Nobel Prize economist William Nordhaus is that the EU, the US and other willing partners should form a “Climate Club”, which takes urgent action by imposing a big carbon tax to drive domestic change. The danger that this tax would drive business elsewhere would be dealt with by imposing a tariff on all goods coming from countries outside the club.

He argues that the cost of the tariff would incentivise many others to join the club. In the fissiparous world of today, this theory may not work in practice.

A more targeted variant of this approach was discussed by Pascal Lamy, the former director general of the World Trade Organisation, at the Dublin conference. He suggested that goods whose production was heavy on carbon emissions should face a “carbon border tax” if there wasn’t a satisfactory carbon tax in their country of origin.

The advantage of this approach is that there would be no incentive to move production of carbon-intensive goods from Europe to other countries with more lax standards. It would also incentivise non-participants to impose suitable carbon taxes on their domestic production.

This proposed border tax would only apply to goods that involve lots of greenhouse gas emissions in their production, such as cement and steel.

Trying to calculate the carbon content of a pair of runners coming from China or Thailand compared to a Portuguese product would introduce too much complexity.

Once a carbon border tax was imposed, it would be possible to levy a common high tax on emissions from heavy industry in the EU without the fear that they would relocate elsewhere. That tax would incentivise heavy industry to find better ways of producing their product, seriously reducing greenhouse gas emissions.

Lamy also indicated that, because of the targeted nature of the border tax, it would fit in with existing trade agreements.

The EU are likely to propose something along these lines later this summer. However, it appears the US may oppose such a move and the UK’s position, which could be important for Ireland, is also not clear.

A common feature of all of these proposals is that they involve a substantial tax on emissions from using fossil fuels. Ireland already has a carbon tax but, if effective action is to be taken to dramatically cut greenhouse gas emissions, it may need to ramp that tax up much more rapidly than currently planned.

It would also help if similar action were taken elsewhere in the EU as going it alone on taxation could see some loss of economic activity to non-participants. For Ireland, this could well be a problem if the UK, and Northern Ireland in particular, does not take similar action, given the open border on the island.