The Financial Review headline restored reality to a week of ‘red alert’ IPCC report-induced catastrophic climate hyperbole: ‘Europe May Clean Up Its Climate at Asia-Pacific’s Expense’. It underlined the self-interest of the developed world, with its 30 per cent of total emissions, trying to bully the 70 per cent developing nations remainder (to whom over the years Europe has effectively ‘exported’ many of its most polluting industries) into conforming with its ‘emissions must be neutral by 2050’ mantra that is due to be sanctified (or even magnified?) at the UN’s Glasgow climate conference in November.
The headline covered an opinion piece about the EU’s self-serving assault on emissions by way of hitting imports with green tariffs that will be largely aimed at our region. While Australia is not directly a large exporter of the initially targeted carbon-heavy goods to the EU (although future items are likely contenders), it does stand to be hit, indirectly, by a ‘Carbon Border Adjustment Mechanism’.which will impact on exports to the EU from Australia’s major raw materials customers (particularly iron ore and coal) in the region.
The EU plan, announced last month, is to replace internal production subsidies and the free pollution permits issued to selected dirty industries with a CBAM which requires firms to purchase pollution certificates when importing products from countries with perceived lax environmental standards. In effect, this imposes tariffs on exporters of carbon-intensive products from countries the EU considers do not have strong enough carbon mitigation regimes. It is in line with growing developed-world pressure to apply penalty tariffs on imports from perceived environmental free riders.
But, as former senior Australian Treasury and OECD trade expert and now LSE Fellow Ken Haydon said last week ‘such policies are a threat to trade and are unlikely to help the environment…. By imposing a carbon border tax and flexing its extra-territorial regulatory muscle, the EU aims to shift part of the burden of environmental reform onto foreign producers…. Over the period 2025–2035, the measures would see EU subsidies phased out and border protection implemented across four sectors: aluminium, cement, fertilisers and steel. These sectors are dominated by Asia Pacific exporters’.
Haydon says that conflict is unavoidable when the plan is implemented, given the difficulty of measuring the carbon emitted by taxable imports — especially those within complex supply chains — and establishing how far foreign governments have already taxed such emissions. Doing so without discriminating between countries, as required by the World Trade Organization, is even more difficult. And he reckons that trade sanctions carry the risk of protectionist capture and of being a brake on the very economic development needed to fund the transition to cleaner energy and, now, to tackle the economic disruption from Covid-19 and the associated acceleration of digitisation.
This is also the view of the Australian government. Trade Minister Dan Tehan recently foreshadowed action at the WTO against the CBAM, which he described as a ‘revenue raiser for Brussels’. And in an opinion piece in the Australian, Energy Minister Angus Taylor condemned the EU plan as an attempt to force its internal standards and domestic carbon tax on the rest of the world. ‘This unilateral step, taken outside the rules-based international system, discriminates against countries like Australia that provide the raw materials global supply chains need to create the goods and infrastructure sought by consumers in Europe and elsewhere. It will punish sectors like aluminium, cement and steel that will be covered in the first phase of this new European protectionism. Over time, other Australian export sectors like agriculture will be in the firing line. At a time when liberal democracies are working together to rebuild confidence on the benefits of free and open trade, a new wave of protectionism threatens to sweep across the world’. While the EU is the only jurisdiction with what it claims to be a WTO-compliant formal proposal for implementing border carbon adjustments, others such as Canada, the US and the UK are considering their own carbon tariffs
Australia is not alone in objecting to CBAM, with all our major Asia-Pacific trading partners expressing concern. There are negative views in China, the world’s largest CO2 emitter with 30 per cent of the total and the EU’s biggest trading partner, from government, the business sector and even the climate community, all of which see CBAM as a tax on exported goods. As producer of half the world’s steel of which large amounts go to Europe, China will oppose CBAM not only because of the potential effects to exports, but also because of the unilateral nature of the measure which violates WTO regulations.
India, the world’s second-largest steel exporter after China, with the EU as a significant steel customer, sees CBAM as ‘a protectionist, unilateral measure that will negatively affect India’. In Japan, CBAM is viewed not as a climate issue but as a trade issue and as a trade conflict waiting to happen. There is a perception in Japan that the main aim of CBAM is protectionist rather than reducing global CO2 emissions. South Korea produces a high percentage of its electricity from coal. Because of this and the large proportion of South Korean exports that go to the EU, a carbon tariff could be a significant burden for South Korean industry, especially the steel industry, automobiles, and petrochemicals. And Indonesia, where the EU is its third-biggest trading partner after China and Japan, is still smarting from the EU’s ban on palm oil and regards the EU’s unilateral approach as protectionist and unfair.
Some see the CO2 tariff as the latest threat to undermine the foundations of the global trade regime that protects against discriminatory treatment and coercion in international trade. This has played a central role in creating the economic strength of the developed world. As the perceptive editorial in last week’s East Asia Forum noted: ‘The EU’s and other carbon tariffs potentially pile more pressure on that principle, threatening to sink it altogether. Their application will necessarily be complex and open to abuse’. It argues that using trade instruments to seek to rid the atmosphere of more carbon dioxide (or other ‘virtuous’ objectives) ‘creates a global economy divided by ideology, contested values and environmental commitments, the costs of which are offloaded onto others by those who espouse them. That world will certainly be a less efficient world where there will be vastly more economic conﬂict’.
And the editorial’s conclusion is that the most efficient and least systemically damaging way to deal with carbon emissions is directly through environmental policy rather than using economically distorting trade policy measures. But the rich Western nations are not listening as they seek to unload the problem onto the developing world in general – and our Asia-Pacific region in particular.
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