As nations consider reducing their industries’ CO2 emissions by imposing taxes or giving subsidies, they worry about cheap imports from countries that impose no such measures. Carbon borders are inevitable. This is also true of EcoCore’s proposed carbon currency based on carbon allowances.
While the USA mandates that subsidised US manufacturing must work with domestic supply chains, the EU will impose import tariffs with their CBAM (carbon border adjustment mechanism).
Foreign manufacturers and service providers located in nations without a carbon currency will be unwilling to demand the corresponding carbon price on their products from importers. It is immediately obvious that a mechanism is required to create a carbon price for all such imports so that domestic industry is not sacrificed to unfair competition from abroad.
The nation’s customs authority must estimate the carbon price on all incoming goods and demand its payment before releasing them to importers. Such carbon border adjustments or import tariffs would draw legal attacks from trading partners unhappy at the protectionist measure. The World Trade Organisation could potentially be called on by aggrieved foreign producers to sue against the imposition of this carbon price on all imports. It is obviously not conducive to free trade.
At the time of writing in 2023, it seems that this is exactly what China intends to do due to the forthcoming introduction by the EU of their CBAM which will levy an appropriate import tax on incoming goods to reflect the built-in CO2 emissions of any importsChina asks EU to justify upcoming carbon tax at World Trade Organization – scmp.com.
The US asked for its steel and aluminium exports to be exempt from the EU’s carbon border adjustment mechanism“US Seeks Exemption From EU Carbon Border Levy to End Tariff Dispute”, Bloomberg reports. Under “business-as-usual” conditions, the issue is likely to repeat right across the economy in every sector that causes significant emissions, each requiring a specific trade deal – a poor alternative.
Setting up Carbon Borders
Every country invests significant resources into their international customs and border controls to regulate international trade. Any import duty is imposed by inspecting officers. The carbon price for the carbon currency framework would be imposed in exactly the same way. The customs officer would require access to a database of pre-calculated carbon prices, and the customs force would be required to build and maintain this database, estimating the equivalent carbon tokens that would have to be spent in the production of the goods.
The theoretical carbon token price would be the cradle-to-grave CO2e emissions, i.e. the scope 1 and 2 emissions under the GHG Protocolsee article on carbon footprints. The resources required to do this price cataloguing would be equivalent to that required if carbon labelling of all foreign imports was made mandatory, something that looks increasingly necessary with or without the carbon currency framework.
Potentially many low emissions products without massive trade volumes could be ignored. However the customs force in the UK is already adept at imposing small charges for import duty.
It’s arguably probable (and research is planned to model this) that two nations implementing the carbon currency and allowing trade in carbon tokens between themselves, could trade together fairly. There would be no emissions-heavy imports between the countries that could skirt the carbon pricing, and there would be no requirement for a carbon border adjustment mechanism.
One distinct problem is the provision of digital services where delivery over the internet is impossible to control. The worst case scenario would be a social media platform that becomes wildly popular, run on servers supplied by coal-fired electricity in a foreign country.
Taking the global roll-out out of the carbon currency to combat climate change to its ultimate conclusion, every country would bring in the carbon currency based on carbon allowances, so carbon borders would be unnecessary. A nation’s trading partners would be operating with an international carbon currency based on budgets agreed at international climate negotiations, so international payments on imports would also involve carbon tokens.