Discover more from Learning by Proxy with Vivek Srinivasan
Taxing Carbon Selectively
The EU wants to tax carbon but not in ways that would hurt its economy.
There is a fundamental relationship between GDP and resources. Every time that GDP goes up, the consumption of resources goes up as well.
If you buy food, it has to be produced somewhere and then transported and then processed and then transported again and then perhaps sold to you.
If you buy clothes, the fibres have to be produced either through agriculture or from petrochemicals and then processed and then sent to some sweatshop in Bangladesh to turn into clothes and then transported and then sold to you.
I can go on but you get the idea.
The growth in GDP produces a commensurate resource consumption that produces pollution.
Boiling the argument down to simply - If you want to save the planet you need to stop growing GDP.
Now, the moment you even dare utter those words in the western hemisphere, people will start running around like their hair was on fire and a quarter of the Amazon would be chopped to write articles about what wrong-headed thinking this is.
This has kept things as they have been for 100 years.
Then Britain said that they had managed to “decouple” GDP and greenhouse gases. GDP went up and emissions did not! This was possible only because they outsourced all the dirty parts of the job to China. So new metrics were invented and it turned out that their net emissions were not coming down.
Now, the EU is sort of, kind of serious about the climate change issue. They want to show that GDP growth is possible without emissions growth.
Last weekend, the San Marino Grand Prix had to be cancelled in Italy because the region is inundated. A few hundred miles away, France and Spain are suffering bouts of what we shall from now on call “Summer Fires”. Venice and Amsterdam are sinking thanks to rising sea levels; not to mention the Netherlands is called the Low Country because half of the nation is below sea level. If there is a considerable rise in sea level, the country is a bathtub waiting to fill up.
So EU has introduced the CBAM, which sounds like a loud weapon but is merely an acronym for Carbon Border Adjustment Mechanism.
The EU’s Carbon Border Adjustment Mechanism (CBAM) is our landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. The gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry.
By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU's climate objectives are not undermined. The CBAM is designed to be compatible with WTO-rules.
Source: European Commission
What they are essentially saying is that EU manufacturers use clean/climate-friendly manufacturing methods and those outside the EU would have to pay a tax equivalent to the cost of using similar methods if they are not. This they suppose will motivate those outside the EU to shift towards cleaner production methods.
Normally I would say that it reeks of protectionism, but if you remove the migrants coming into Europe, the entire continent is dying. Who are they going to protect? Who will manufacture there?
The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. With this enlarged scope, CBAM will eventually – when fully phased in – capture more than 50% of the emissions in ETS covered sectors. Under the political agreement, the CBAM will enter into force in its transitional phase as of 1 October 2023.
The gradual phasing in of CBAM over time will allow for a careful, predictable and proportionate transition for EU and non-EU businesses, as well as for public authorities. During this period, importers of goods in the scope of the new rules will only have to report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions), without making any financial payments or adjustments. The agreement foresees that indirect emissions will be covered in the scope after the transitional period for some sectors (cement and fertilisers), on the basis of a methodology to be defined in the meantime. The objective of this transition period is to serve as a pilot and learning period for all stakeholders (importers, producers and authorities) and to collect useful information on embedded emissions to refine the methodology for the definitive period.
Source: European Commission
Do you see the omission? Oil and Gas! Agricultural Produce! They have also left out rare earth minerals.
They have announced the names of only 6 specific industries in their first list. They have left out industries that aid and abet the greatest pollution across the world. Agriculture represents 1.4% of the EU economy at EUR 222 Billion it is a minuscule part of the economy, sure they can go after fertilisers. But they have left out the agriculture that they import because that will cause spiralling inflation and people in France already want Emmanuel Macron to be dealt with the same way that Marie Antoinette was. Imagine if food prices were to shoot up!
They have gone after construction, with a declining population how much more construction will be needed? Since they are already in bed with Natural Gas, going after Hydrogen makes sense. Whoever is exporting electricity to the EU?
Nevertheless, it is a start. Creates a precedent which is good.
Whether emissions go down with increasing GDP or not will be seen. I am certain in the meantime, tax collection will definitely go up!
The tax is expected to raise as much as €14 billion ($15.4 billion) a year for the EU. The ensuing reforms of the overall carbon market are projected to cut EU emissions by 62% by 2030, from 2005 levels.
“It is one of the only mechanisms we have to incentivize our trading partners to decarbonize their manufacturing industry,” Mohammed Chahim, the European Parliament’s lead negotiator on the law, said in a statement in December, during the contentious negotiations over the tax.
Whether other countries establish similar regimes would be interesting to watch out for. A country exporting fertilizers to the EU can use the same principle and establish a carbon tax on the export of cars from the EU.
Fun times ahead!