Reposted by Forbes
Tilak Doshi contributor
I analyze energy economics and related public policy issues.
With the long-awaited “Fit for 55” package, which is supposed to make Europe climate neutral by 2050, the EU published a whole series of additional climate policies on July 14th. This also includes their most controversial plan – the Carbon Border Adjustment Mechanism (CBAM). On July 19, the US Democrats tabled a similar bill to tax imported goods on their carbon content from countries without strict environmental regulations. Details on the US proposal are sparse. A leading newspaper article stated that the US would “charge companies that want to sell steel, iron and other goods to the United States a price for every ton of carbon dioxide they emit”. their manufacturing process. If countries can’t or won’t, the United States could impose its own price. ”It seems that the Nordhaus Climate Club has become the political vehicle of choice for“ climate emergency ”advocates on both sides of the Atlantic.
Why the climate club
At first glance, the logic of the climate club is simple enough. It is intended to replace the earlier flawed architectures of the Kyoto Protocol (1997) and the Paris Agreement (2015), which were voluntary international agreements to reduce CO2 emissions. To alleviate the problem of “free riders” that inevitably arise with such agreements, the Climate Club would create an incentive structure that punishes nations that do not obey the rules.
The EU and US want to impose trade tariffs to balance the cost of carbon dioxide emissions from producing an imported good with what a domestic manufacturer would pay to produce the same good. European and American companies are less competitive because they have to pay for their emissions, while foreign companies that export to them do not. Therefore, emission reduction regulations will encourage companies in the West to move their production “offshore” to developing countries that have less burdensome emission restrictions, a process known as “carbon leakage”. Brussels and Washington, it is alleged, merely wanted to create “a level playing field”. Of course, the question arises, whose playing field?
The European Commission will initially apply the CBAM to imports from energy-intensive sectors such as iron and steel, aluminum, cement, fertilizers and electricity, which will come into effect from January 2026. A bank analysis found that Russia, Turkey, Ukraine, India and China will be among the hardest hit by the CBAM. The complexity of the plan worked out in Brussels ensures that exporters to the EU have their jobs. Exporting companies must document detailed CO2 audits of their emissions, including calculating the percentage of emissions already otherwise covered by CO2 taxes (domestic and for imports used to produce the exports). If these complex and expensive analyzes exceed the compliance capacities of companies, especially small and medium-sized companies, the EC will unilaterally set CO2 tariffs based on the dirtiest 10% of European manufacturers of the same good.
The critics of the climate club
On July 26, China opened its first volley of defense against the EU’s plan to introduce the world’s first carbon border tax, declaring that it intruded climate issues into international trade norms, broke WTO rules and undermined prospects for economic growth. When it emerged in early April that both the EU and the US government Biden were considering extraterritorial and unilateral policies to impose their own preferences on the “fight against climate change”, India also took a position similar to China. It issued a joint statement with the BASIC bloc – Brazil, South Africa, India and China – calling CBAM “discriminatory” and expressing its “grave concern” Could go higher, but there is a catch that the US stayed The world’s largest oil producer in 2020
Critics of the Climate Club – a club that threatens to be both exclusive and punitive for non-members – point out that CO2 border taxes violate Article 4 of the UN Climate Change Panel. an integral part of the climate negotiations since the first United Nations Earth Summit in Rio in 1992.
Last week, India quoted the G20 on climate change and energy as citing this longstanding just principle in combating the net zero by 2050 target set by the EU, the US, the UN Climate Change Panel and other rich country-dominated multilateral organizations such as the IEA, the World Bank and the IMF. India’s Environment Minister Bhupender Yadav said: “… in view of the legitimate growth needs of developing countries, we urge the G20 countries to commit to reducing per capita emissions to the global average by 2030”.
While the global average is 6.5 tons of CO2 equivalent per capita, India emits almost 2 tons, the USA 17.6 tons and Germany 10.4 tons. India claimed that since the rich countries had already “consumed” most of the available “carbon space” in the atmospheric sink since the industrial revolution, the goal of “net zero by 2050” was insufficient.
The critics are not limited to developing countries. Australian Prime Minister Scott Morrison called the proposed carbon tariff plan “trade defense under a different name”. Like China, Russia sees the CBAM as a violation of WTO rules and had already made its views clear a year ago when the EU presented its Green Deal plans, which provided for CO2 tariffs.
Problems with the climate club
Apart from Article 4 of the UN Climate Change Panel, there are areas where the proposed CO2 tariffs could contradict WTO trade rules. They may violate the WTO’s non-discrimination rule, a cornerstone of international trade norms, which stipulates that any benefit granted to imported products from one WTO member must be granted immediately and unconditionally to similar products from all other WTO members. CO2 tariffs could also not be compatible with the “national treatment rule” of the WTO, another cornerstone of modern international trade under the WTO regime, which requires that imported products are treated “no less favorably” than similar domestic products. If European manufacturers continue to receive free emission allowances (as they are now doing under the EU Emissions Trading Scheme), the EU will be found to be a violation of the “national treatment” rule.
It seems that the supposed climate club members of the rich countries are heading towards a dead end with the rest of the world in the rules of international trade that have largely prevailed since World War II. On the one hand, we have a little less than 20% of the world’s population represented by political elites who believe that “science is done” and that a “climate crisis” is imminent. On the flip side, we have the vast majority of the world’s population – over 6 billion – who have emerged from wretched poverty or tried desperately in the past few decades. For those starting to enjoy – or at least having the chance to try – the fruits of economic growth and technological advances in Asia, Africa and Latin America, their worries have less with concerns about the carbon footprint of economic growth pretending to ensure economic growth resumes after the devastation caused by the Covid pandemic lockdowns.
But there is one final twist. The political elites of the West, convinced of climate models that supposedly predict dire climatic conditions decades in the future, seem to be confronted with the pressures of democracy in their own backyards. After Switzerland broke off negotiations with the EU, the country rejected a climate protection law in a referendum last month. The referendum rejected all three parts of the law in separate votes: on CO2, pesticides and drinking water. Two days ago, British Prime Minister Boris Johnson, who saw an increasing voter backlash over rising heating bills with his plans to ban gas boilers in British homes in favor of expensive, newfangled heat pumps, delayed his government’s plans by 5 years to 2040.
For Europe, the greatest lesson of mass politics against the climate policy supported by the metropolitan elites was the Gilet Jaune protests, which were triggered by fuel taxes. As one astute observer put it, “The French love a good uprising, but the political backlash to the French government’s plans to increase carbon taxes on fuel may be a harbinger of what’s to come in countries that do Committed to Global Warming Crusade ”. No wonder, then, that a leading economist at Deutsche Bank, one of the largest banks in Europe, warned that “a certain ecological dictatorship will be necessary” for the success of the EU-Green Deal. The critics of the climate club have history on their side.
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I have worked in the oil and gas sector as an economist in both the private sector and think tanks in Asia, the Middle East and the US for the past 25 years. I focus on global energy developments from the perspective of Asian countries, which are still large markets for oil, gas and coal. I have written extensively on the topics of economic development, environmental and energy management. My publications include Singapore in a Post-Kyoto World: Energy, Environment and the Economy, published by the Institute of Southeast Asian Studies (2015). I won the World Bank’s Robert S. McNamara Research Fellow Award in 1984 and received my Ph.D. in economics in 1992.