Villepin’s assertion comes quickly on the heels of a European Commission (EC) report on the issue that was leaked to the weekly European Voice, and in the wake of the release of the British Government’s now-famous Stern review on the catastrophic economic impact of global climate change.
Calls for the implementation of such a carbon tax have recently been mounting in several European capitals.
This week, Villepin asserted in Paris that he “would like to study now with our European partners the principle of a carbon tax on the import of industrial products from countries that refuse to commit themselves to the Kyoto Protocol after 2012.”
Villepin’s statement is in accord with the Stern review’s release. The review identified carbon pricing as one of the three main tools to militate against the adverse impacts of climate change.
According to a draft paper obtained by the European Voice in October, an EC high level working group composed of industry and government representatives essentially outlined the possibility of introducing a carbon leakage tariff.
“This shows how serious the EU is about tackling climate change”, said Bellona climate expert Aage Stangeland.
“This initiative should prompt the US as well as China and India to take a closer look at joining a new international agreement on CO2 emissions after 2012.”
What is an import tax?
An import tax or import tariff is sometimes imposed by a country on imported goods in order to maintain the competitiveness of exports. It is considered one of the most straightforward ways to prevent firms in low-tax countries or regions from preying on their competitors in high-tax regions. In this way, foreign firms are placed on a level playing field with those in the importing market.
However, such a measure like the carbon tax likely goes against the World Trade Organisation’s (WTO) aim to increase international trade by promoting lower trade barriers.
What about the WTO?
The WTO, a global organisation dealing with the rules of trade between nations, and whose main function is to ensure that trade flows smoothly, predictably, and as freely as possible, has generally attempted to minimise such import tariffs.
Could imposing a carbon tax as described above open a Pandora’s box?
Yet surprisingly to many, the WTO is not just about liberalising trade, and in some circumstances its rules support maintaining trade barriers in order to, for example, prevent the spread of disease or protect consumers – and, in one instance, even to protect turtles.
A precedent with shrimp
In the 1990s, the United States imposed a ban on the import of certain shrimp and shrimp products from India, Malaysia, Pakistan and Thailand, arguing that the shrimp was being harvested in environmentally harmful ways. These four countries in turn brought a joint complaint before the WTO.
At the heart of the US ban was the protection of sea turtles. The US claimed that the harvesting methods used by the four Asian nations were harmful to species of endangered turtles found in the fishing areas.
Eventually, the WTO’s appellate body ruled that the US ban could be justified in order to protect shared environmental resources, if it was genuinely intended to protect the environment and diplomatic efforts had been exhausted.
So, could the shrimp case provide a precedent for a carbon tax on imports? It certainly seems like it could.
“The issues of trade and environment have often collided and there are very clear cases and legal precedents from the WTO dispute settlement mechanism which legitimise such measures,” said Bellona policy advisor Paal Frisvold.
The ETS and industry
Villepin’s pitch for the carbon tax comes as European Union (EU) industrialists argue that the European Emissions Trading Scheme (ETS) has placed EU companies at a disadvantage compared with global competitors who do not have the same constraints.
The ETS, launched on January 1st 2005, is based on the assumption that creating a price for carbon through the establishment of a carbon market offers the most cost-effective way for EU countries to meet their obligations under the Kyoto Protocol and move toward a low-carbon economy.
It is a ‘cap and trade’ system, where a regulator establishes a ‘cap,’ or maximum amount of emissions from a designated group of polluters to a level lower than their current emissions. Polluters are given allowances, for example, the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level.
Those who pollute beyond their allowances must buy credits from those who pollute less than their allowances. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. As a result, when polluters need to purchase more credits, the price of the credits increases, which makes reducing emissions cost-effective by comparison.
EU should not act alone
The idea of an import tax is not supported by UNICE, the European business association, which has emphasised that the EU should not act alone. As reported by Euractiv, UNICE climate change expert Daniel Cloquet expressed the “highest reserves” over the carbon tax suggestion and voiced concerns over a potential “commercial war” with China and the United States, which do not have cap and trade systems.
UNICE considers that an effective international strategy after 2012 should “give investors in climate change mitigation confidence in the long-term value of their investments.” Most importantly, this should be achieved through a scheme including all large emitter nations.
US increasingly isolated
Until now, the United States and Australia have been the only industrialised nations that have not ratified the Kyoto Protocol. However, Australia’s recent announcement that it will consider an international carbon trading system – central to the Kyoto Protocol – to fight global warming could leave US President George Bush feeling increasingly isolated on the world climate change battlefield.