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Europe introduces new tax on greenhouse gases

The EU approves the world’s first imported carbon tax. It is designed to make certain products more expensive if they come from manufacturers that do not pay for their greenhouse gas emissions.

It doesn’t get much attention, but it’s a big deal because these tariffs are very effective at reducing industrial CO2 emissions that are heating the planet to dangerous levels. This is a potentially powerful incentive for countries to curb emissions. But it is also in some ways a risky move, as it could disrupt global trade and have a huge impact on poorer countries.

Here are some key things to know.

First, what is a carbon border tax?

The stated goal of these tariffs is to level the playing field. Imagine that European steelmakers are paying for their CO2 emissions while their competitors outside the EU are not.

This will put European countries at a price disadvantage. In theory, it could also push European companies to move operations to countries that don’t tax carbon. This is what experts call “carbon leakage,” where emissions can be diverted elsewhere when restrictions are imposed.

To avoid this, Europe will impose a carbon border tax, formally known as the Carbon Border Adjustment Mechanism, on foreign competitors who are not paying as much for their emissions, or paying nothing at all.

The new tax will be imposed from 2026 on seven high-emitting industries, including steel and cement.

The European law, which was formally approved last week, has reignited discussions in other countries about a carbon border tax. Senator Sheldon Whitehouse, a Rhode Island Democrat, told me in an email that he plans to introduce a new proposal to impose a similar tax in the United States in the coming months.

“I am optimistic that there is a path to bipartisan carbon boundary adjustment through the Senate,” Whitehouse wrote. “We can boost cleaner American manufacturers that are fighting high Pollution peer competition.”

what this means for developing countries

Taxing emissions could cost jobs in developing countries where costly proposals to decarbonize the economy are especially complicated.

Take India, a country that relies heavily on coal for energy. A 2022 study by Boston University calculated that Indian steel could be subject to a 15% tax under new European rules, which could lead to a 58% drop in Indian steel exports to Europe. That could be a big problem for India, whose steel industry indirectly employs some 2 million people.

Is it fair?

Major emerging economies such as Brazil and India, as well as smaller emerging economies such as Thailand and Cameroon, are not happy with Europe’s move.

Some countries say it is a thinly disguised way for Europeans to protect their companies from international competition under the guise of climate policy. (Sound familiar? That’s exactly what the US Lower Inflation Act has faced some foreign criticism.)

Perhaps more importantly, critics of the new European tax say the countries that contribute least to climate change should not pay as much as the industrialized countries that are causing the problem.

They pointed to a principle enshrined in the 2015 Paris Agreement and other environmental agreements. It said that while the overall responsibility for stopping environmental damage and climate change was shared by all countries, each country bore varying degrees of responsibility according to its own circumstances.

This principle has not had much impact in international trade. Varun Agarwal, a climate policy expert at India’s World Resources Institute, told me he thinks the law is unlikely to be challenged by the World Trade Organization.

“Right now, the principle of fairness is not reflected in trade policy,” he said.

Still, Rishikesh Ram Bhandary, a climate finance expert at Boston University’s Center for Global Development Policy, said the success of Europe’s carbon border tax may depend on how these differences play out.

The policy could help appease some opponents of national climate action by assuring critics that the competitiveness of local companies will not be compromised, he said. But he added that by exacerbating distrust between countries when it comes to climate policy, it could also “unwittingly have the exact opposite effect of increasing polarization.”

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