Since the 2022 passing of the Inflation Reduction Act (which contains large subsidies for environmentally-related products and industries), I have seen a lot of media coverage about trade friction between the U.S and EU. The green subsidies that favor U.S. companies, by definition, penalize those companies from elsewhere and, given that the EU is perhaps the most advanced economic region in promoting environmental awareness, the companies most affected tend to be European. Before the IRA, however, there was the Green Deal, which was passed by the EU in 2020. A key part of this legislation was the Carbon Border Adjustment Mechanism (CBAM), which is an attempt to account for carbon emissions in products made in countries that don't otherwise tax that externality. The article in the first url below covers the details of CBAM, which were announced at the end of last year and represent the first attempt to tax imports based on the carbon emitted during their production (see Strategic CSR – Global carbon tax):
"The European Union reached an agreement to impose a tax on imports based on the greenhouse gases emitted to make them, inserting climate-change regulation for the first time into the rules of global trade. The deal … ends more than a year of negotiations on the details of the plan. The EU is expected to adopt it in the coming weeks as part of a sweeping package of legislation that would step up the bloc's efforts to limit global warming."
The EU is understandably proud of taking the first step on this issue:
"The plan, known as the carbon border adjustment mechanism, would be the world's first tax on the carbon content of imported goods. It has rattled supply chains around the globe and angered the EU's trading partners, particularly in the developing world where manufacturers tend to emit relatively large amounts of carbon dioxide. It has also unsettled manufacturers in the U.S. who are concerned the measure would create a new web of red tape to export to Europe."
The reason for this concern in the U.S., as noted in the article in the second url below, is that this legislation is as much about economic policy as it is about concerns for the environment:
"The 'carbon border adjustment mechanism' is aimed at protecting E.U. companies subjected to strict environmental rules from the risk of being crushed by competition with businesses from countries whose rules on emissions are looser. It is also designed to encourage other countries to adopt similarly ambitious emissions rules."
Thus, for all the criticism that the IRA has received for being a protectionist trade measure, the U.S. can legitimately point out that the EU started it. The exchange of blame raises one of the most frustrating aspects of tackling climate change, which is that every time a policy is proposed or (heaven forbid) implemented, the reason most often cited for why it can't possibly work is that it causes some disadvantage for some group that relies on the carbon emissions that the policy is trying to eradicate. But, of course, that harm is being inflicted because that is the main point. Since we are clearly incapable of surrendering our reliance on carbon voluntarily, some coercion is required, which will lead to a period of transition that is going to be challenging because it is new. If we want to decrease the consumption of carbon, we need to make it more expensive, which means that a higher price cannot be the reason for not doing it. Why we cannot have an honest discussion about this as a society is beyond me. Whenever a cost increase is a result of a policy change, those with less economic power (and/or a higher dependence) are going to be disproportionately affected since they have, by definition, less money. But, since economic theory of supply and demand is the best means we have devised of allocating scarce and valuable resources, there is no way around this. If we increase the cost of emitting carbon, then consumption will decrease, but those that rely on carbon or who resist reducing their consumption, will pay more. And, of course, the longer we take to acknowledge this, the higher the cost of switching becomes.
Take care
David
David Chandler
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EU to Tax Impots Based on Emissions
By Matthew Dalton
December 14, 2022
The Wall Street Journal
Late Edition – Final
A1, A8
New E.U. Tax Hits Countries Failing to Halt Gas Emissions
By Emma Bubola
December 14, 2022
The New York Times
Late Edition – Final
A12
