Europe itself looks unlikely to introduce a carbon border tax any time soon, with the EC’s trade commissioner-designate warning that such a move could lead to a ‘trade war’.
This is despite some powerful EU interests being in favour. Nicolas Sarkozy is calling for an EU-wide carbon tax and specifically, a carbon tariff on imports. He has vowed to press ahead with new taxes in his own country, despite a setback to those plans at the end of last year.
US lawmakers have also taken a shine to the idea, with the Waxman-Markey bill passed by the House of Representatives including provisions for a border tax.
The idea of a carbon border tax is appealing because it could not only protect domestic industries, but remove the likelihood of the emissions cuts by one country simply being offset by another. As the FT opined last year, it might even be legitimate under WTO rules.
But it could also be blindingly complex and counterproductive, raising the spectre of “endless WTO dispute panels poring over flow-charts of east Asian production lines late into the night”.
Meanwhile the size of the carbon leakage risk itself is actually quite hard to determine. Think about the ‘additionality’ problem with carbon offset projects, and add in the complexity of determining exactly how big business decisions, such as relocating production overseas, are made – and you’ll see the challenges involved.
The EU, in determing sectors that are susceptible to carbon leakage, allows for those that would bear at least a 5 per cent cost increase as a result of the domestic carbon regulations, and where net imports equate to at least 10 per cent of the industry; a pretty rough reckoner, in otherwords.