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The Effects of ‘Carbon Tariffs’ on International Trade
Global climate change is a global concern and for good reason. Major economies, including China, the European Union, and Japan, have put forward their targets of carbon peak and carbon neutrality. The Biden administration, in rejoining the Paris Agreement, is recommitting itself to cutting carbon emissions. Green development is becoming a global consensus and a new theme for the future development of all countries. In this context, countries, mainly European ones, are currently working on a carbon tariff system. If implemented, such a system will not only have far-reaching impacts on global green development but will also become a new factor in international trade and could change the global economy.
The concept of carbon tariffs originated in EU countries, aiming to promote regional green emission reduction through tariff regulation. On January 15, 2020, the EU adopted the European Green Deal, which sets out the EU’s carbon reduction target of achieving carbon neutrality by 2050. This green development strategy calls for a new system of carbon tariffs across the European Union. The EU sees this move as an incentive for EU and non-EU trade sectors to decarbonize in line with Paris Agreement targets, and to avoid unfair price competition for EU companies as a result of efforts to mitigate climate change. On March 10 of this year, the European Parliament voted in a plenary session to approve the Carbon Border Adjustment Mechanism (CBAM) bill, which will impose carbon tariffs on some goods imported into the EU and is expected to be implemented from 2023 onwards.
On the U.S. side, since the commencement of the Biden administration, the U.S. has changed its attitude on climate change. Now, it is actively participating in the implementation of the Paris Agreement. According to an agenda released by the Office of the United States Trade Representative, the Biden administration is considering imposing a carbon border tax or a border adjustment tax, which would raise import tariffs on products from countries the U.S. considers responsible for addressing climate change. Meanwhile, UK Prime Minister Boris Johnson, as a G-7 leader, has suggested pushing for carbon border taxes among the G-7 member countries. It is clear that the establishment of a carbon tariff system is in the cards for developed countries to deal with the climate issue.
The significance of establishing a carbon tariff system is to promote regional green development and global carbon emission reduction. However, this new system means that the international free trade system under the World Trade Organization framework will be affected. In addition, it may also indicate that developed countries are using carbon emission reduction as an excuse to establish new trade barriers to raise the production costs of underdeveloped countries that are lagging behind in carbon reduction, so as to protect their related industries.
If developed countries take advantage of environmental technology to occupy the markets of underdeveloped countries, it will form a new trade inequality. This, in fact, is disregarding the lagging capacity of underdeveloped countries in carbon reduction. According to the EU, the four key objectives of a carbon tariff are: limit carbon leakage; prevent the decline of domestic industrial competitiveness; encourage foreign trading partners and foreign producers to take measures comparable/equivalent to those of the EU; and, the proceeds would be used to finance clean technology innovation and infrastructure modernization, or for international climate finance. The mechanism should cover power and energy-intensive industrial sectors, such as cement, steel, aluminum, oil refineries, paper, glass, chemicals, and fertilizers. The establishment of this new system means that the global trade pattern under the WTO framework will change, and the industrial layout and economic structure of each country will be affected. Some analysts believe that if each country and region formulate such a de facto tariff system, it may develop into a global trade war.
According to Japanese media reports, Japan has a strong sense of crisis over the situation and plans to put forward a proposal to launch negotiations on the issue at the relevant meeting of the WTO on March 22. In addition to seeking U.S. participation, Japan also intends to act as a bridge with emerging countries with higher emissions by providing proposals to reduce import tariffs on products that contribute most to decarbonization, including wind power, ammonia fuel cells, batteries, and solar power. The EU is informally proposing to key countries for environmental rules to be drawn up through the WTO, which is likely to be the main battleground for discussions. At present, the relevant mechanism coordination has been carried out on the basis of the OECD.
The carbon tariff system will significantly affect China’s imports and exports, and its impact may be no less than the trade dispute between the U.S. and China. According to Tencent Research Institute, China is a net exporter of carbon emissions. In 2018, China exported 1.53 billion tons of goods with implied CO2 emissions and imported 542 million tons of goods with implied CO2 emissions. Net exports of goods with implied CO2 emissions accounted for about 10.5% of the country’s total emissions. Among them, the export to the EU amounted to 270 million tons, accounting for 17.6%; imports from the EU amounted to 31 million tons. Most manufactured goods exported by China are in the middle and low end of the international industrial chain, with high energy consumption and low value-added. Given that coal-fired power generation is an important part of China’s energy structure, China’s energy carbon emission factor is much higher than the average level of the EU, and the products produced in China do not have any advantage in terms of carbon tariffs. This means that after the implementation of the carbon tariff system, Chinese exporters will face unprecedented pressure. At the same time, EU exports, which are mainly low carbon products, will be more competitive, thus increasing exports to China. These factors will inevitably change China’s international trade pattern.
In the long run, this new mechanism will force China to carry out industrial adjustment and upgrading and promote the optimization of China’s industrial structure. It can be said that the implementation of the carbon tariff mechanism means that a new international trade system and industrial competition pattern focusing on climate change are taking shape around the world. Whether it is an active adjustment or passive transformation, it means that the transformation of China’s economic development pattern will take place. From this point of view, the strategic thinking of building a hydrogen society is more forward-looking. The most pressing task for China is to establish a green development system, such as the system for carbon trading and carbon pricing, so as to maintain the country’s competitive advantage.
Under the backdrop of addressing climate change and implementing low carbon development, the EU has promoted the establishment of a carbon tariff system, which has attracted the attention of major developed countries. In the future, this new system will bring about changes in the international trade system and industrial pattern, posing new challenges to China’s development and participation in international competition.
Wei Hongxu graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham in 2010 and is a researcher at Anbound Consulting, an independent think tank headquarters in Beijing.
Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s academic research activities are in economic information analysis, particularly in the area of public policy.