The Carbon Tariff Wars Arrive

"The European Union has a penchant for racking up firsts that should have stayed "nevers" and the latest example is the world's first carbon tariff. 

The European Parliament this week pulled the trigger on the opening shot in a new climate trade war.

The Carbon Border Adjustment Mechanism, or CBAM, is an outgrowth of the EU's Emissions Trading System -- which lawmakers also tightened this week. As the EU requires manufacturers to buy ever more expensive permits for carbon-dioxide emissions, fears have mounted that manufacturing would shift offshore.

The CBAM is the supposed solution. Foreign companies that haven't paid for carbon emissions at home will have to pay a tariff when exporting goods to Europe. The aim is to equalize the cost of carbon emissions embedded in all goods prices within the EU, no matter where a product is produced. Starting in October the CBAM will apply to a small number of imported goods such as steel and fertilizer, with the list expanding over time.

Climate coercion advocates say a tariff is needed to avoid "carbon leakage," which is their term for the flight of manufacturing to countries with less onerous emissions restrictions. 

This is a tacit admission that Europe's climate policies are failing. Companies subject to the rules can't compete without permanent tariff protection, while European consumers won't pay higher prices for greener goods unless the Brussels tax man forces them to.

The bigger message is that trade is becoming the next battlefield in the climate wars and it will be a bloody one. Foreign companies and governments have raised concerns about the European carbon border tax, which imposes complex and costly compliance burdens and then imposes steep default tariffs on companies that don't play along.

China and India are in the crosshairs of this border tax, although companies from any country that doesn't impose emissions taxes will have to pay. That includes U.S. firms.

Europe is also headed toward a related trade war with the U.S. over the Inflation Reduction Act. That law's subsidies for electric vehicles and much else are most generous for production in North America, which may violate Washington's global trade commitments. 

The subsidies have become another excuse for the carbon tariff. They could also give Europe grounds to impose antidumping or retaliatory tariffs on the U.S. -- at which point Europe's new carbon border tax would offer a ready justification for an American counterpunch.

Consumers will be the big losers, first in Europe and then elsewhere. Europeans are about to discover more goods will become more expensive thanks to this border tax, a cost they can ill afford when they're also paying excessive energy prices thanks to Europe's many other green flights of policy fancy.

Climate evangelists always promise that an efficient, affordable green economy is just around the corner. But it never arrives, the big bills never stop coming, and Europeans this week received their latest one." [1]

1. The Carbon Tariff Wars Arrive
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 21 Apr 2023: A.18.