Carbon border tariffs: How would they work and how may they affect businesses?

Tax | | MIC Customs Solutions |

Could imports one day be subject to taxes over their environmental cost?

The European Commission has proposed the world's first carbon border tariffs, which would see carbon-intensive imports penalised and aim to protect businesses in Europe that are subjected to EU carbon pricing.

In a European Green Deal roadmap released at the end of last year, the commission said this "would ensure that the price of imports reflect more accurately their carbon content" so companies can be charged for their emissions at a high enough price to act as a deterrent.

"Should differences in levels of ambition worldwide persist, as the EU increases its climate ambition, the commission will propose a carbon border adjustment mechanism, for selected sectors, to reduce the risk of carbon leakage. This measure will be designed to comply with World Trade Organisation rules and other international obligations of the EU," the document said. 

A second report suggested industries including steel, cement and aluminium could be among the first to be tested.

However, as an article for Recharge News points out, a carbon border tariff may be difficult to implement for a number of reasons. 

Firstly, how would the carbon content of products made overseas be calculated? Would they only apply to primary products, or also to secondary products that happen to contain taxable materials, such as smartphones that contain metal?

Secondly, carbon border taxes could increase the prices of imported products, which might negatively impact businesses and drive up inflation.

Finally, such levies may exacerbate the issue of trade wars, which have already been a major problem and a factor in destabilising the global economy in recent months.

Carbon taxes are actually not a new phenomenon, with the World Bank stating there are currently 29 in existence and a further 20 carbon pricing initiatives scheduled for the near future.

However, there is disagreement over how much they have reduced emissions, with many saying prices have been too low to truly encourage changes in polluting behaviour.

It has been suggested that the issue of making businesses less competitive could be addressed with a policy that stops companies required to pay carbon taxes from losing out to those overseas that do not.

Indeed, the Grantham Research Institute on Climate Change and the Environment at the London School of Economics has said a uniform carbon price worldwide might curb this and prevent 'pollution havens' from springing up in nations not required to pay tariffs.

The incoming European climate commissioner Frans Timmermans has said he would support tariffs on imports, priced according to how much carbon was used in their production and transportation.

He also suggested they would be compatible with World Trade Organisation rules, but added further research is necessary to verify this.

Yet other analysts insist implementing carbon border taxes could be risky, with the potential for 'tit-for-tat' tariffs as retaliation in the same manner as the trade war between China and the US.

Another issue highlighted is that of manipulation and corruption, with governments high on the list of polluters potentially being tempted to alter their figures if it meant avoiding taxes.

The Centre for Economic Policy Research suggests a list of basic principles that may be necessary in any roll-out of a tariff on carbon at the border, including:

• Limiting the scope to carbon-intensive basic goods

• Applying the tariffs to imports only, not for the benefit of exports

• Not differentiating imports by country of origin, except for certain exemptions for less developed nations.

The organisation also says it thinks implementing a carbon border tax may take several years, something backed up by comments on a feasibility study made earlier this month by EU trade commissioner Phil Hogan.

"I expect it will be 2021 or later this year before we see a paper or some conclusions coming [out] of this process. So it's a bit early to say how it will work. But at least it's on the agenda," he said.

For businesses that trade abroad, it may eventually be necessary to mitigate the costs of any tax on carbon at the borders by altering supply chains and using greener partners.

However, for the time being at least, it remains a case of 'wait and see' what happens in terms of legislation.