During the COP26 conference, the idea of a carbon offset tax on imports of goods or raw materials from high-emission countries emerged.
For more than 20 years, economists and public officials have proposed a carbon footprint tariff to level the trade playing field and pressure U.S. and European trading partners to raise their emission control standards.
The 2018 Nobel laureate in economics, William Nordhaus, proposed that lower-emitting countries impose a 3% tariff on imports from higher-emitting countries. This year, the European Union (EU) in July proposed a carbon footprint tariff. The current policy imposes a cap on emissions, and companies must pay for the right to emit CO2. Current carbon credits currently cost around $68 per metric ton of CO2.
With these tariffs, both European and American bureaucrats are seeking to tackle steel imports from China. During the G-20 conference, the United States and the EU agreed to end their trade dispute over aluminum and steel.
Although tariffs on steel imports between America and Europe will end, the new measure will only allow a certain amount of steel to be imported from the EU and vice versa with steel imports from the U.S. to Europe.
The carbon tax on imports, as proposed by EU officials, would impose a tax on all 27 EU countries, but raw materials from countries that have emissions mitigation systems in line with those of the EU would be exempt from these taxes.
A report by the consulting firm KPMG shows that much of the developed world has cut emissions in exchange for outsourcing pollution-causing activities to developing countries.
According to the consulting firm, Boston Consulting Group (BCG), an import tax of around $30 per metric ton of CO2 could potentially reduce the profits of oil producers by 20% and steel producers by as much as 40%.
According to BCG, in some sectors the tax could completely rewrite competitive advantages. For example, “European manufacturers may find that the cost of Chinese or Ukrainian steel produced in blast furnaces is now less favorable than the cost of the same type of steel produced in countries that require more efficient methods to reduce carbon emissions.
The BCG report also indicates that, for example, Saudi oil producers could benefit over their Russian or Canadian competitors by not having to drill as deep to extract crude oil, which would give them a competitive advantage, as the other two producers have to incur more energy-intensive methods to extract the raw material.
The United States would benefit from such an agreement, for as Dow Inc. chemical manager Jim Fitterling explains, “America has a huge advantage of a smaller carbon footprint.”
Despite the support of European and American bureaucrats, the effectiveness of an emissions tariff has yet to be proven. Russian aluminum producer Rusal PLC has announced plans to set up an energy-efficient plant to sell in Europe, while keeping the rest of its plants active to serve domestic demand and the Asian market.
According to The Wall Street Journal, the policy could have an adverse effect, as countries such as China or Russia could end up redirecting their sales to developing countries that do not have the restrictions of the EU or the United States.