The Morality of Carbon Border Taxes

By Doug McConnell

The European Parliament has adopted a tool called the Carbon Border Adjustment Mechanism (CBAM) which will apply the EU’s carbon pricing to imported goods. This means that imports from countries with lesser or non-existent carbon pricing will effectively face a tariff. Various governments including Australia and China have objected strongly to the CBAM claiming that it unfairly forces EU rules on other countries, discriminates against them, and represents a return to the bad old days of trade protectionism.

So are CBAMs a noble mechanism to push the world towards carbon neutrality or the latest tool for powerful nations to assert control over weaker nations? I argue that the CBAM does have the potential to be discriminatory and unjust but not against rich countries like Australia that have had ample opportunity to develop (and maintain) a carbon pricing system.

The CBAM operates as follows: “EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer.”

The CBAM has a number of benefits. First, it prevents “carbon leakage” where EU based companies move carbon-intensive production to less regulated countries, or EU products are replaced by more carbon-intensive imports. Second, it protects European companies from being undercut by non-EU companies who can operate more cheaply in less regulated environments outside the EU’s Emissions Trading Scheme (ETS). Third, it reduces the benefit of being the ‘last mover’ towards stricter environmental regulations thus encouraging other countries to adopt a price on carbon and thereby reduce their carbon emissions. Finally, the revenues raised by the CBAM will fund the EU’s “green transition” helping the EU decarbonise.

On the face of it, then, the CBAM looks like a useful tool for those leading the way on decarbonisation to bring others with them and discourage carbon free-riders. There are, however, a range of objections to the CBAM. Here I will look at a couple of the morally-charged objections.

The CBAM might place unjust costs on developing nations who, through no fault of their own, cannot easily decarbonize their exports. These developing nations face a much greater hurdle to decarbonize their production due, in part, to colonial pillaging (often at the hands of EU nations) and without the accumulated economic benefit of historical fossil fuel use (an advantage that the EU has enjoyed). Seen in this light, the CBAM is a new way for wealthy countries to exert power over less wealthy countries who have not had a fair chance to develop low carbon technologies/systems.

If the CBAM applies the same rules to all imports no matter the country it comes from this unjustly overlooks the different capacities of nations to decarbonise. Recognition that nations have ‘common but differentiated responsibilities and respective capabilities’ was rightly endorsed by the Paris Agreement and the UN Framework Convention on Climate Change (UNFCCC).

The outline of a solution to this problem would be for the CBAM to only target developed nations or for some graduated application of the CBAM that tracks nations’ capability to decarbonise.

Although this objection to the CBAM has some weight when it comes from developing nations, richer countries who have about as much capacity as the EU to decarbonise, cannot avail themselves of it. Nevertheless, Australian government officials have complained that the CBAM discriminates against Australia. The Australian Minister for Energy and Emissions Reduction, Angus Taylor said in an open letter (4th August 2021).

“This unilateral step, taken outside of the rules-based international system, discriminates against countries like Australia. Countries that provide the raw materials that global supply chains need to create the goods and infrastructure sought after by consumers in Europe and elsewhere.”

Here, Taylor suggests that someone has to produce the raw materials that we all rely on and because Australia produces more than many other nations, it is disproportionately and unfairly affected by the CBAM in contrast with economies that export products that are inherently easier to decarbonise. But this overlooks the point that all producers of those raw materials, i.e. Australia’s relevant competition, will be equally effected by the CBAM. Of course, Taylor might claim that Australia is discriminated against because it happens to produce relatively carbon intensive raw materials. But that discrimination can be justified because of the harm that stems from carbon emissions (and Australia has a relatively high capacity to decarbonise).

Finally, is the CBAM morally unjustifiable because it is protectionist? Certainly one of its explicit goals is to protect EU companies from any disadvantage resulting from paying the EU’s price on carbon. The moral acceptability of typical protectionist tariffs is complex. Many people believe that a degree of partiality towards one’s own nation is justified so, to that extent, some use of tariffs to protect one’s own companies and workers might be justified (of course, tariffs might still be a bad idea because ‘trade wars’ can increase the cost of living). However, tariffs often prevent money flowing for richer countries to poorer ones by limiting poorer countries’ capacity to undercut richer countries. In such cases, tariffs can undermine a more equitable distribution of wealth. But, whatever the moral acceptability of typical protectionist tariffs, the CBAM has an extra moral reason in its favour. The CBAM will arguably contribute to global decarbonisation and benefit people worldwide, especially in the poorer countries least able to adapt to climate change. Therefore, the CBAM is much better than most protectionist tariffs.

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