Belong To The Climate Club Or Get Penalized: The EU’s New Trade Protectionism

Reposted from Forbes

By Tilak Doshi

Trade protectionism has venerable roots in the history of economic thought, from Germany’s celebrated Friedrich List in the 1840s to Raul Prebisch who headed the UN’s Economic Commission for Latin America in 1950 and advocated import-substituting industrialization behind a wall of tariff and non-tariff barriers. Prebisch’s theories became a canon of a failed economic development strategy in post-colonial Asia, Africa and Latin America as their “infant industries” seldom grew up to compete in world markets. They instead became conduits for crony capitalism, corruption and loss-making public investments in the developing countries.

Governments favouring important domestic political constituencies at the expense of international trade is common enough in the OECD countries as well. The EU’s Common Agricultural Policy, for instance, has often been called out as one of the more onerous burdens imposed on millions of developing country farmers. Showering subsidies and tariff protections on affluent European farmers, swelling food output and depressing world food prices is a well-documented part of the historical record. But what the EU is now contemplating in its protectionist arsenal is an altogether different animal. What sets off this new protectionism from its predecessors is the sheer scope of its application.  

Trade Protectionism Old And New

On March 10th, the European Parliament overwhelmingly endorsed the creation of a “carbon border adjustment mechanism” (CBAM) that would shield EU companies against cheaper imports from countries with “weaker” climate policies. The ‘CBAM’ will raise revenues to fund the “Green Transition” or, to use a term which has been elevated to a mantra by European policy-makers, “net zero by 2050”. The carbon border tax is one of the highlights of the European Commission’s $750 billion Green Deal.

Its adoption as EU’s policy posture could precede the G-7 meeting in Cornwall, U.K., slated for June 11 – 13. Kwasi Kwarteng, UK’s business secretary in the Boris Johnson government and host for the meeting, opined that “there will be a discussion about carbon border adjusting, carbon leakage. That has to be part of the multilateral discussion”. By “carbon leakage”, Mr. Kwarteng means that as richer countries have tightened their green regulations, many energy-intensive industries have migrated to countries that do not have such regulations. Carbon leakage will doubtless also be a central issue at the UN’s 26th Conference of Parties (COP26) hosted by the UK when it meets in Glasgow in November. Alok Sharma, member of the Boris Johnson government and President-Designate of COP26, has called for the world to “get on track for net zero by 2050”.

By penalizing CO2 emissions, the only path up the energy ladder which allowed people in the now-developed countries to graduate to their current wealth and comfort is denied to the developing countries. The EU’s plans punishes those countries that do not adopt the EU proclamation of the “climate emergency” and willingly forfeit the benefits of fossil fuel-based industrialization and economic growth for their citizens. Even more egregiously, the EU will utilize the revenues derived from carbon border tariffs to assist itself in financing its Green recovery plans.  

The Climate Club

The European Commission’s  Executive Vice President Frans Timmermans said earlier in the year 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.” So, according to Mr. Timmermans, many countries outside of the EU are “distorting competition” since they have not implemented similarly punitive climate rules and regulations on their own industries.

The Nobel Laureate William Nordhaus’ solution to carbon leakage would be to set up a club of countries that have similar climate change policies that would freely trade with each other while imposing some form of carbon tariffs on all others not in the club. Now that the Biden administration has elevated climate change to its highest priority across the whole of government, it would seem that the EU and the US working together with like-minded governments in Canada and the UK would be in a position to set up a “trans-Atlantic climate club”  and thereby impose a global cost on carbon emissions.

For Those Outside The Climate Club

It is no surprise that many countries outside of the climate club find the EU’s proposed  ‘CBAM’ to be deeply concerning. Australian Trade Minister Dan Tehan labelled carbon tariffs “a new form of protectionism”. India, the world’s fourth largest carbon emitter, is not keen on joining the climate club. Referring to calls for a pledge to achieve “net zero” by 2060, Raj Kumar Singh, India’s minister for power, told a meeting organised by the International Energy Agency (IEA) last week that “2060 sounds good, but it is just that, it sounds good…I would call it, and I’m sorry to say this, but it is just a pie in the sky.” Even more baldly, he said that poor nations need to continue using fossil fuels and the rich countries “can’t stop it”. For most developing countries, “worries of an increasing carbon footprint generated by economic growth are second to worries that growth many not happen at all”.

It is not clear how the EU’s ‘CBAM’ proposal could be consistent with WTO rules and particularly the “Most Favoured Nation” obligations on WTO members which specifically outlaw discrimination among countries. Even John Kerry, the Biden’s administration’s international climate envoy leading the clarion call on the “global climate emergency”, raised concerns about the EU’s carbon tariff proposals as potentially causing disastrous fallout on international trade and relations. It would seem that the climate clubbers will have their work cut out for them at the UN climate conference in November.