A trade dispute is in the offing between China and India and the European Union, which is implementing a carbon tax on such things as cement, steel, and fertilizer. Importers bringing goods into the EU must report their carbon emissions on those products. And starting in 2026, there are penalties for excess emissions.
EU has a couple of goals: to reduce CO2 emissions to comply with the Paris Agreement and to make domestic goods cost-competitive with those of China and India. Regardless, the fee will add to the prices end users pay.
China and India say the so-called Carbon Border Adjustment Mechanism (CBAM) is unwarranted, calling it a “trade barrier.” While India said it could meet the EU’s needs by creating internal tax incentives to go green, China has indicated it could respond in kind, potentially setting off a tit-for-tat trade conflict.
The developing nations say the EU’s actions need to consider their progress in deploying carbon-reduction strategies. Moreover, they say the move will increase the cost of their products by 4% to 6% — an untenable situation that makes their goods and services uneconomical.
“The EU’s unilateral establishment of CBAM is in essence a new trade barrier created under the auspice of low carbon,” the China Iron and Steel Association said, per Reuters.
“We will find a solution around a domestic tax,” said India’s Commerce and Industry Minister Piyush Goyal, in a story published by MoneyControl.com. “If we collect a tax in India and use it for our green energy transition, which will indirectly help the same companies that are exporters as they transition to cleaner energies and bring down their carbon footprint, there will be no additional CBAM.”
The broader question is what effect carbon taxes have on global economics.
Under a domestic carbon tax, the government assesses utilities and industries according to their carbon footprints. The Republican-led U.S. Climate Leadership Council says that British Columbia has such a carbon tax: The government gradually increased the tax and redistributed it to individuals. The council proposes to tax carbon at $40 per ton, which it says would generate $194 billion in year one and $250 billion 10 years later.
The Outstanding Perils
The Brookings Institution and the American Enterprise Institute reported that pricing carbon is the most efficient way of reducing CO2 releases.
“By the end of the century, climate change could cost the U.S. economy $500 billion per year,” add 500 business leaders across the United States representing E2. “This sum is much larger than the current GDPs of most states.”
BP, Chevron Corp., ExxonMobil, Shell, and Statoil have also said that a uniform carbon tax is superior to an international patchwork of laws. Moreover, those oil giants have significant investments in natural gas, which has become the leading fuel to replace coal.
There’s a cost to industrial production that gets passed on to consumers. In other words, emitters of CO2 and other greenhouse gases have gotten a free pass — a cost that the greater society has picked up. Consider: about 33 billion tons of CO2 gets emitted each year. And we have less than 30 years to hit net zero — to reduce emissions and to offset the balance.
It’s noteworthy that the American Petroleum Institute favors a carbon tax. It would start with a price of $35 to $50 a ton of CO2 emissions, which would be adjusted yearly for inflation. The money would go to reducing the energy cost for low-income households and researching and developing cutting-edge technologies.
Carbon taxes are “the most impactful and transparent way to achieve meaningful progress on the dual goals of reducing greenhouse gas emissions while simultaneously ensuring continued economic growth,” the institute writes.
Institutional investors are demanding to know the outstanding perils and are pushing companies to reduce their carbon footprints. Corporations must thus map out their carbon emissions — a strategy that the EU is deploying and asking of China and India.