Fuel for a dirty war

THE European Union wants to slash greenhouse-gas emissions to 80% below 1990 levels by 2050. It is on course to cut just half that amount. To get back on track, on February 15th, the European Parliament voted for a plan to raise the cost for firms to produce carbon. It has prompted growing calls for the bloc to tax the carbon emissions embodied in the EU’s imports. At best, such a levy will barely curb emissions. At worst, it could cause a trade war.

The EU’s latest reforms try to put up the price of carbon by cutting the emissions allowances firms are granted. They include the EU’s first border tax on carbon, levied on cement imports. Steel firms, also heavy users of carbon, say their exclusion from this scheme is unfair. This week Lakshmi Mittal, the CEO of ArcelorMittal, the world’s biggest steelmaker, offered his support for the tax. Similar proposals in America are also gaining support. This month a group including two Republican former treasury secretaries, James Baker and George Shultz, proposed a similar carbon tax on all imports at the border.

Boosters say such proposals remove the distortions carbon taxes cause. Under the EU’s reforms, steelmakers in Europe would pay up to €30 ($32) to emit a tonne of carbon, but foreign producers selling in the EU would not have to pay a cent. Putting an equivalent tax on these imports is a neat solution to this problem. “It’s wonderful in theory,” says Jean Chateau, an economist at the OECD, a club of rich countries. But “in reality it’s very problematic.”

One big problem is how to calculate the carbon in imports. This is not easy even for simple steel sheets; for items made of several bits of metal from different sources, it is hellishly complex. Some countries might even refuse to provide the information. And any method brought in for foreign firms, if not applied to local ones, could fall foul of WTO rules, adds Michael Moore of George Washington University.

The environmental impact of such policies can be overstated. Several studies by economists at the DIW Berlin, a think-tank, have found little evidence that raising the EU’s carbon price without a border tax has distorted trade so far. Border taxes may not force dirty producers to close anyway.

But what trade economists fear most is the risk that border taxes could spark a tariff war, adds Chris Beauman of the European Bank for Reconstruction and Development. Lobby groups could easily pervert the charges into a form of quiet protectionism. The EU and America are already in a politically driven tit-for-tat over steel duties with China. Rather than prod countries to tighten their own environmental regulations, new carbon tariffs could make that more vicious. A global carbon price would produce far greater economic benefits than border taxes, but would require closer international co-operation. A trade war is not the way to get there.