EU Carbon Border Levy: A Recipe for Failure

Guest essay by Eric Worrall

If the upcoming COP26 Climate Conference in November fails to make progress towards a global carbon pricing scheme, the EU will impose a Carbon Border Levy. But there is no practical way to make such a levy work – an EU border carbon levy would be a choice between carbon carousel fraud or ruin for EU exporters.

Why the EU’s proposed carbon border levy is an important test for global action on climate change

January 29, 2021 1.39am AEDT
Neil Kellard

Dean, Professor in Finance, Essex Business School, University of Essex

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The current price of an allowance to emit greenhouse gases is around €33 per tonne, a price already much higher than the average over the life of the ETS. However, to meet EU climate change targets, this price will need to be more like €40 by 2030 and close to €250 in 2050. Given the substantial costs this will impose on EU firms, either to pay for allowances or to invest in low carbon technologies, companies based outside the EU will have a hefty competitive advantage unless they face similar regulatory controls in their own countries.

This is why the European Commission, the EU’s executive branch, plans to present its carbon border levy in June 2021 as part of its Green Deal planning. Frans Timmermans, the first vice-president of the European Commission, recently stressed that:

“It’s a matter of survival of our industry. So, if others will not move in the same direction, we will have to protect the European Union against distortion of competition and against the risk of carbon leakage.”

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Read more: https://theconversation.com/why-the-eus-proposed-carbon-border-levy-is-an-important-test-for-global-action-on-climate-change-154041

Why do I say a carbon levy would be a choice between carbon carousel fraud or ruin for exporters?

Professor Kellard only mentions the impact of the levy on imports to the EU. But what impact would the levy have on EU exports?

If EU manufacturers pay a massive carbon price on their inputs, they’re stuffed – they cannot compete against global producers who don’t pay the same carbon price.

What if the EU panics and attempts to provide a rebate for high carbon exports, to prevent the collapse of their export industry? In this scenario they open the door to carousel fraud.

Carousel fraud involves fraudulently altering the customs description of goods to take advantage of different tax and rebate schemes. Its a carousel because the same container of goods is repeatedly imported and exported. The only thing which changes is the customs declaration, which is completely fraudulent on at least one leg of the journey.

Even without the opportunities a carbon border levy would provide for criminals, a carbon border levy would do nothing to prevent carbon leakage, the departure of industries from the EU.

Unless the levy was prohibitively high, high enough to trigger a trade war, it would still make more sense to site the manufacturing centre outside the EU, to pay the border tax when exporting to the EU, but to keep costs down and remain competitive when exporting anywhere else.

But a professor of finance should know all this.