In Europe, carbon taxes are the new mercantilism

The European Union (EU) has found a 21st century way of imposing Trump-style import tariffs, and it’s bad for everyone. The EU just got a brand new executive on the lead of its first female president, former German Defense Minister Ursula Von der Leyen.

She had been the compromise candidate between Chancellor Angela Merkel — who was keen to have her get out of Berlin due to an alleged corruption scandal in her department — and French president Emmanuel Macron, who appreciates that she has a French cultural orientation.

Given a recent move toward more environmentalist policies in Europe, Von der Leyen’s platform builds on radical environmental shifts.

The European Green Deal

You know you are a bad student when the title you copied so obviously resembles that of your neighbor that it would have been preferable to just rip it off word-for-word.

The “European Green Deal” (EGD) is the European Commission’s legislative package it aims to push through.

Revealed in December, the proposal contains a myriad of reforms, from recycling to emissions trading and road emissions duties to energy taxation.

During the presentation of the EGD, president Von der Leyen said:

“In other words: This transition will either be working for all and be just, or it will not work at all. And therefore, a crucial part in the European Green Deal is the Just Transition Mechanism. We have the ambition to mobilize 100 billion euros precisely targeted to the most vulnerable regions and sectors.”

While that is a lot cheaper than the “Green New Deal” of Rep. Alexandria Occasio-Cortez, D-N.Y., which comes in a whopping $93 trillion.

The EU’s plans also contains provisions that would cost a lot more than its infrastructure projects.

The Carbon-Border Tax

One of the flagship proposals of the European Green Deal is the carbon border tax, also known as carbon-border adjustment. This measure tries to mitigate the effects of “carbon leakage.”

Carbon leakage is an unintended consequence created by environmental standards.

If you require industry to adopt certain production standards, many producers will choose to make their goods outside of the jurisdiction where these rules apply.

For instance, a factory in Poland bound by EU environment rules can choose to produce in Ukraine, which is not a member of the EU and bring the goods back to Poland.

This is, in essence, an environmental version of the effect of high corporate taxes, or high cost of labor. As the United States requires higher salaries through minium wage laws, companies choose to produce in Mexico and bring goods back into the U.S. once completed.

President Donald Trump’s tariffs seek to mitigate that effect with tariffs (which is a terrible idea.)

In general, we can assert that despite its name, the measure won’t be a tax in the direct sense of the word, because the EU is more likely to adjust exceptions rather than introduce a levy. Here’s where it gets a little more technical.

Such a “tax” has never been implemented anywhere in the world, and it raises questions whether it is actually legal under the rules of the World Trade Organization (WTO).

The WTO can strike down trade measures if it deems it contrary to existing trade deals, or unfairly benefitting one country at the expense of others.

For that, the EU seems to have thought about a solution already, through its Emission Trading System (ETS). This framework charges industries for the CO2 they emit, by quantifying the environmental cost of a ton of carbon dioxide.

The directive establishing the ETS states that measures to support energy-intensive industries should be reviewed in light of international developments, and that such a review “could” include consideration of “whether it is appropriate to replace, adapt or complement any existing measures to prevent carbon leakage with carbon border adjustments. (EU 2018).”

In plain English: by saying that importers need to respect EU climate laws, the EU circumvents international trade rules set by the WTO.

For instance, the EU could exempt steel and aluminium (which have large carbon dioxide emissions) imports from free allowances, which would affect foreign imports considerably.

Where’s the difference to Trump?

Trump has also levied tariffs on steel and aluminum from Europe, in an effort to “protect American jobs.” In reality, its American businesses and consumers who end up footing the bill for these tariffs.

Instead, the U.S should practice free trade, which is the economically reasonable policy of mutual exchange. That is also what the European Union tells Trump when opposing his presumed “retaliatory tariffs.”

In reality, the European Union is just as protectionist as the United States. The notable difference is that Europe has found more elaborate ways to implement the same policies, and all too often, get away with it.

Developing nations would be hit the most by a carbon-adjustment. Imports from Iceland might already be close to respecting EU environmental rules, while African nations cannot pride themselves with the same situation.

Once again, poorer countries would be punished by international trade policy.

The industrialized world reduces the amount of emitted carbon dioxide as it progresses technologically.

Emerging countries need to be given the chance to innovate through trade.

Cutting off foreign imports will thus be neither good for industry, consumers, or the environment.

This article was first published by Newsmax.

Pictures are Creative Commons.

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About Bill Wirtz

My name is Bill, I'm from Luxembourg and I write about the virtues of a free society. I favour individual and economic freedom and I believe in the capabilities people can develop when they have to take their own responsibilities.

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