Europe to Put 'Green Tariff' on Dirty Imports

Perhaps this post should have a warning: "Do not operate heavy machinery after reading." After all, the word "tariff" can put you to sleep. But this is interesting and important: The European Union is calling for a “green tariff” on goods produced with high carbon dioxide emissions.

Let's say you are in the steel business, and you build a factory that makes steel with hydrogen instead of coke like Hybrit does in Sweden. The steel mill was expensive, and the hydrogen costs a lot more than the coking coal. Meanwhile, in Russia and China, they have old dirty steel mills running on cheap coal. So when a building contractor goes out to tender the steel for a project, it's likely that the Chinese supplier will get the contract. That's globalism in action and it has lowered the cost of many products. But while the imported steel may be cheaper in terms of money, there is a real cost of those carbon emissions that everybody pays.

So to level the playing field, the European Union is proposing a carbon border adjustment mechanism (CBAM) that would raise the price of imports that emit a lot of carbon during their production to make the cleaner product competitive. The CBAM will likely apply to iron and steel, cement, fertilizers, aluminum, electricity, and even hydrogen.

Without the CBAM, Europeans are worried that many businesses would move to countries with lower environmental standards. "The agreement is a world first. For the first time, we are going to ensure fair treatment between our companies, which pay a carbon price in Europe, and their foreign competitors, which do not," said Paul Canfin, the chair of the EU environment committee, reports The Guardian. "This is a major step that will allow us to do more for the climate while protecting our companies and our jobs.”

Canfin also noted it may be extended to manufactured products: “We have also provided for the future integration of processed products, such as cars.”

Many outside the EU are outraged and claim that it is all about those jobs and that it is blatant protectionism. South Africa, India, and China might all be targeted, and the South African trade minister told the Financial Times that “if it gets to be an enormous defining thing between north and south, you’re going to have a lot of political resistance.”

Screaming the loudest are Americans. The U.S. trade representative said “there are a lot of concerns coming from our side about how this is going to impact us and our trade relationship,” as it keeps making aluminum with coal-fired electricity.

According to The Wall Street Journal:

"Cru­cially, ne­go­tia­tors de­cided to in­clude so-called in­di­rect emis­sions in their plan, which are released not by the man­ufac­tur­ers them­selves but from the power plants they rely on for elec­tric-ity. Most emis­sions from alu­minum pro­duc­tion, for ex­am­ple, are gen­er­ated by the huge amounts of elec­tric­ity used by aluminum smelters. That pro­vi­sion could be a sig­nif­i­cant bar­rier to Chi­nese pro­duc­ers of alu­minum and other goods, given that they rely heav­ily on coal-fired elec­tric­ity."

The Journal's editorial board said, "Carbon tariffs show how climate policy has become an anti-growth project." They give space to Kevin Cramer, a senator from one of the biggest coal-producing states, who said, "The U.S. has noth­ing to apol­o­gize for. The rest of the world needs to clean up. The U.S. has been the world leader in low­er­ing car­bon emissions—re­duc­ing emissions more than the next eight emis­sions-re­duc­ing coun­tries com­bined from 2000 to 2016."

But if American products were cleaner, there would be no worries about paying the CBAM. It does seem to be an incentive to clean up their act.

Others don't think the EU goes nearly far enough. The World Wildlife Fund calls the scheme "half-baked." It wants the money raised to be invested in the countries that paid it. "WWF deplores the fact that co-legislators did not agree on using revenues generated through the sale of CBAM certificates to fund climate action outside the EU." It also wants the EU to decarbonize faster.

This CBAM thing is all too complicated and contentious. In our last totally boring post about aluminum tariffs that complained about American taxes on imported aluminum, I concluded that "carbon emissions don't recognize borders, and neither should aluminum production." Materials and products should come from the lowest carbon source. There should be some international mechanism to recognize where that is, and to put a big honking carbon tax on the high carbon sources wherever they are, whether it is Kentucky, Poland, or China.

Keep it simple: If it emits carbon, it gets taxed. That is the kind of incentive we need.