Rhein on Energy and Climate

Politicians have little time to think and therefore often come up with bizarre ideas. One of these is the carbon border tax proposed by President Sarkozy and favoured also by other politicians in Europe.

A carbon border tax is an instrument for protecting European industries against imports of carbon-intensive products like cement, steel, aluminium or heavy chemicals from countries like China or India, which do not impose climate regulations as the EU does.

Read also: Climate Change Lecture Series: Setting The Right Economic Incentives

A priori the argument sounds plausible. But in fact it is not.

First, the 20 percent reduction of C02 emissions target by the EU for 2020 is expected to lead to a price of € 15 per ton of C02, corresponding to 3-4 cents per litre of gasoline, far too little to have a serious impact on cost. European manufacturers will therefore not suffer from a competitive handicap.

Second, no border tax whatever its level will be able to prevent European companies from outsourcing their energy-intensive production lines to countries with less stringent climate regulations (“carbon leakage”).

If the EU were to substantially toughen its climate measures leading to C02 prices of around € 50 per ton, without emerging countries following suit, it may have a case for protecting a small range of extremely energy-intensive industries against “distorted competition”. But at present prices the proposal is not serious, and will only poison the atmosphere. It should remain a potential weapon of persuasion for the future.

Brussels 17.10.09 Eberhard Rhein

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