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The Gamechanger: Border Adjustment Tariffs

10 mars 2021

The proposal from the EU Parliament on border adjustment tariffs, probably part of the EU Commissions proposal in June and echoed by Biden’s USA, could be the gamechanger the climate desperately needs.

Whilst it is increasingly clear that a decreased carbon footprint can lead to improved competitiveness for companies with products that are chosen by the final consumer, it is less obvious for the producers of raw materials.

We start to see – and I applaud – construction companies demanding cement with the lowest possible carbon footprint, and everything from automobile manufacturers such as Jaguar LandRover to computer company Apple changing to a supplier with a lower climate impact from the steel and aluminium they use. But the producers of these raw materials still very often compete mainly on price, and they may become less competitive if they are subject to high carbon taxes in Europe, whilst their competitors elsewhere pay no such taxes.

This has been the rationale until now. With Border Adjustment Tariffs, as proposed by the EU parliament now and most likely by the EU commission in its “climate gap proposal” in June, everything changes. The EU will then add a tariff equivalent to the carbon tax or cost of emissions rights to imported goods that have been produced in countries and regions with no such tax.

Starting with cement, aluminium, steel and fertilizer – all goods traded across the globe with a high climate impact – the final price to the consumer will then not be artificially low for manufacturers in countries where all the costs of the carbon emissions are paid by the society rather than by those causing the emissions. The competitiveness of European manufacturers will go up, and they will not need to worry about the rising prices of emission rights in the EU or the proposed raise in carbon tax in member countries – since the same amount will be added to the price of the competition, if they don’t have such a tax at home.

Under President Biden, the US is also venturing into Border Adjustment Tariffs. Thus, as I believe the editorial of the Bangkok Post pointed out, countries that currently do not have any carbon tax no longer help their industries by not putting a price on the emissions. Instead, their choice is now to either introduce a carbon tax or pay the tariff. With the tax, the money stays in the economy – in this case Thailand’s – whereas without it, the money goes to the EU and the US federal budgets. My bet, and the Bangkok Post concurred, is that many countries will prefer to introduce the tax and keep the money.

Make no mistake, the tariff won’t be easily introduced. There will be complaints, potentially all the way to the WTO and its mechanisms for settling of disputes, and if this even resembles a barrier to free trade, it will be hard to implement. The tariffs may never reach the consumer goods we buy in the shops – but it will influence them whenever they are made from materials covered by the BAT, as the acronym goes.

The result will be marginally more expensive cement, steel, aluminium, fertilizer and other materials, since the cut-price offerings from countries with limited climate ambitions will have a tariff added to the price. This should be factored in by construction companies and others who have bought the cheapest material without any preference for more climate friendly solutions. But more importantly, it will mean improved competitiveness for European manufacturers, more countries with some sort of carbon tax and – hence my enthusiasm – a reduced climate impact from sectors where this is critically needed for the world to successfully combat climate change. This may well be the game changer the fight against climate change so badly needs.

Mattias Goldmann, CSO, Sweco

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The report “Towards a WTO-compatible EU carbon border adjustment mechanism (2020/2043(INI))” by the European  Committee on the Environment, Public Health and Food Safety can be found here.

Dubbad till riddare för sitt klimatarbete av franska regeringen. Utsedd till Mäktigast i Hållbarhetssverige. Runner-up i Årets Opinionsbildare. Ansvarig för kampanjen som vann Årets Lobbyist. Årets Framtidspolitiker. Tidigare vd för tankesmedjan Fores.

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