The world is turning its attention to the climate, as increasingly erratic weather patterns disrupt food production and transport, health and safety, and contribute to the energy crisis. Thus, to combat climate change, governments are looking to tackle global emissions — as this is the primary cause.
In 2021, carbon emissions directly related to traded goods accounted for a quarter of all global emissions. To tackle this, governments are looking at carbon tariffs. But, what are they, will they work in the fight against climate change, and what do they mean for the merchants and exporters in the countries that will bear them?
Table of Contents
What are carbon tariffs and why are they being discussed?
Will carbon tariffs help tackle climate change?
How do carbon tariffs affect China’s exports?
Impact on China’s export of renewable energy systems
Are carbon tariffs a type of back-door protectionism?
What are carbon tariffs and why are they being discussed?
Carbon tariffs are a type of Carbon Border Adjustment Mechanism (CBAM) that will function as a border carbon tax. These fees may soon be levied by the likes of the UK, Canada, US, and EU on exporting industries and merchants from countries without equally high carbon fees, such as China.
Many countries are looking to improve national global emissions targets and incentivize a green transition by imposing higher fees on high polluters at home. The EU has committed to a 55% net emissions reduction target by 2030 compared to 1990 levels, while the UK increased its target from 57% to 68%, both of which will be incentivized through higher carbon fees.
However, imposing national carbon levies when other countries are not could mean affected manufacturers in these countries relocate, causing “carbon leakage” — a mass exodus of high-polluting businesses, who then import goods back into the country without paying the home taxes. This would mean a reduction in national production and do little to combat the climate crisis. Thus, to level the playing field, these countries are proposing carbon tariffs.
Will carbon tariffs help tackle climate change?
Trading has a simple profit strategy: buy/produce for less and sell for more. To maximize this profit strategy, many producers have moved their factories to countries that have lower fees and less stringent policies. This makes sense when looking at emission figures, where developed countries with higher fees and tighter carbon emission regulations are seeing dips in their emissions while developing countries with lower fees and more relaxed rules are seeing an increase.
Carbon tariffs would disincentivize that move as well as disincentivize increases in emissions from exporting countries. This is because, despite local rules and regulations, any exporting, carbon-emitting producer will have to pay a carbon tariff/tax to the importing country. In addition, the more emissions they produce, the more tax they pay at the border.
By closing the carbon tax evasion loophole previously found in relocation, these countries are incentivizing carbon reduction outside of their own borders. In addition, as the countries considering imposing these tariffs are some of the biggest import markets in the world (the US, Canada, the EU, and the UK), the incentive for these producers is large.
If carbon tariffs are high enough, both on a national level and as a CBAM, manufacturing industries at home and abroad will look to switch to renewable energies or find ways to cut down their emissions. In turn, if global emissions are reduced, the planet’s increasing temperature may slow — resulting in a crucial win in the fight against climate change.
How do carbon tariffs affect China’s exports?
In a study simulating the effects of carbon tariffs on China, exports decreased to those countries — the EU, the US, and Canada. However, exports increased to other countries — other Asian countries, Africa, Russia, Latin American countries, and Australasian countries, for example.
This change will mean lower economic losses from export trade for China. However, as the EU, US, and Canada constitute a huge market, China will look to continue this international trade by reducing carbon fees. This will mean switching to lower-carbon emitting fuels, levying its own carbon taxes (as the UK and others have), tracking its industries’ ESG reports, and/or decreasing its share of carbon-heavy exports while increasing the export share of other industries.
For individual merchants exporting from China, the carbon tariffs will mean different things for different industries — with those emitting more carbon subject to higher fees. For example, those industries working within the renewable energy sector, such as producers of PV solar and energy storage systems, may face different carbon tariff rules to those working in the manufacture of plastic or other high emission-emitting industries.
Impact on China’s export of renewable energy systems
China is the world’s biggest producer of solar PV panels and has a near-monopoly on the production of polysilicon — a raw material used in the production of these panels. This makes the Chinese renewable energy industry incredibly important to these carbon tariff-imposing countries. Solar systems and other renewable energy equipment are conducive to the cutting of global emissions and are vital in helping these countries hit their emissions targets.
In 2018, the US imposed anti-dumping tariffs on Chinese solar panels to protect its own domestic production. Following this, a probe was launched to investigate whether Chinese companies were circumventing these tariffs by exporting their goods from other Asian countries. The stalling of exports, which was further exacerbated by the threat of backtracked tariff fees, meant a serious shortage of panels and a negative result on the carbon-cutting targets of the US The tariffs and investigation resulted in 62,000 fewer jobs in 2017-2021, $19 billion in lost investment, and 10.5GW of lost solar deployment, according to the Solar Energy Industry Association (SEIA).
With this in mind, developed countries will be looking to re-encourage exports of PV and storage systems by cutting tariffs. The US has already declared a 24-month halt on all tariffs on solar exports from Cambodia, Thailand, Malaysia, and Vietnam. This halt will also mean no possibility to backdate tariffs for that period, even if the investigation finds that Chinese companies have abused the system by exporting their panels from these countries.
These rules show that major importing markets still rely heavily on China’s export of renewable energy equipment, such as PV panels and energy storage systems. Thus, as long as those industries maintain low levels of carbon emissions, they should benefit from this 24-month period and be able to avoid border carbon tariffs.
Are carbon tariffs a type of back-door protectionism?
With the potential to negatively impact the economies of lesser developed countries, there is a concern (from the affected countries) that carbon tariffs act as a type of back-door protectionism for already developed, wealthy countries. These countries argue that the policies put in place by developed countries to tackle climate change are costly and by imposing carbon tariffs on exporters, they are able to shift the economic burden.
However, if those exporting countries were to impose their own national carbon tariffs, they would be exempt from the border tariffs and would keep their taxes — which could further a green transition to place them in a strong position in the new low-carbon markets.
China, which will be one of the hardest hit as a leader in the production of raw materials, such as steel and cement, argues that the tariffs do not take into consideration the economic development of each country. However, climate change will not wait for any country’s economic development and these tariffs will force an essential reduction in carbon emissions.
China, as a leader in the development of many renewable energy products, such as PV panels and energy storage systems, could also take this as an opportunity for a faster switch to green energy. It is already taking measures of its own to curb its emissions, such as aiming for a 25% share of non-fossil fuels by 2025 and increasing the adoption of electric vehicles.
Initially, it is true that there could be a negative impact on international trade, but as countries such as China and India move to reduce their carbon emissions, these tariffs will soon reduce or disappear. This is further backed up by researchers at Tsinghua University, who believe that the impact will fade over time and that there is no evidence of adverse long-term effects on China’s development.
Conclusion
Carbon tariffs are a necessary evil that will push down emissions in high-polluting countries while also keeping pollution levels down in the imposing countries. They will not work as a stand-alone move to combat climate change, and there are concerns that they could have a negative impact on green transitions. This was exemplified by the shortage of PV panels in the US when tariffs were first imposed on China.
Carbon tariffs are a good start when considering ways to reduce global emissions, however, some changes could be necessary. One consideration could be to drop tariffs, or reduce them, on those goods that do not have a negative effect on the climate.
