Climate change is getting nasty. And we’re not talking about the weather. The climate change policies rolled out by the European Union in the past few weeks make it clear Brussels will use trade sanctions to push these policies overseas. Legislation tabled before the US Senate indicates the next Washington administration will go down the same slippery slope.
Wrongly or rightly, carbon emission curbs have become the kernel of the West’s anti-climate change policies. The only existing multilateral carbon curbs are those enshrined in the Kyoto Protocol. The European Union and, increasingly, the US, are right now putting together their post-2012 carbon policies, when the Kyoto’s existing carbon limits expire. Brussels has laid out the most ambitious target: to slash Europe’s emissions by a fifth by 2020. As long as this was unilateral, it was praiseworthy. However, as the policy has evolved, it has become increasingly about forcing ‘advanced developing countries’ to accept similar cuts. “With no assurance that China and India will agree to such commitments, EU and US policy-makers feel compelled to include the threat of trade measures in draft proposals,” says consultant Trevor Houser, author of a forthcoming book Leveling the Carbon Playing Field.
When the EU Commission was debating the policy, its directorate of industry argued the costs of carbon curbs would make some 50 subsectors of the European economy vulnerable to imports. Industry asked for tax compensation, says Jacob Kirkegaard of the Peterson Institute for International Economics. But EU trade unions demanded an offensive weapon: carbon tariffs. In other words, imports coming from countries that had not accepted carbon curbs should face some sort of economic penalty. The original target was the US. But as it has become clear, a post-George Bush administration will embrace the Kyoto Protocol, the target is now countries like India, China and Brazil.
The EU has avoided explicitly mentioning carbon tariffs, preferring euphemisms like ‘border adjustment mechanisms’ and mentioning them as one among several policy options. The EU Commission President Jose Manuel Barroso, speaking to the European Parliament on January 23, was blunt: “There is no point in Europe being tough if it just means production shifting to countries allowing a free-for-all on emissions”. If parts of the world failed to sign up for a post-Kyoto agreement, “we will look at other options such as requiring importers to obtain allowances, alongside European competitors.” Translation: if India is not part of a carbon treaty by 2012, its firms will have to buy European carbon credits to export to the EU. Various European officials are frank in saying that whatever form the penalty takes, it would effectively be a tariff, designed to produce a “carbon level-playing field”.
Brussels seems confident it can unilaterally calculate such carbon tariffs by simple input-output calculations of, say, Chinese steel or Indian aluminium plants of certain technological specs. Houser disagrees. Accurate carbon measurements would require an inspection team inside each plant, monitoring production from start to finish. “Assessment at the border on a case-by-case basis is nearly impossible,” he says.
Inevitably, determining the amount of such tariffs would be up to the discretion of Brussels and be based on labour and industry lobbying in Brussels. The EU is contemplating modelling such levies on anti-dumping rules, the World Trade Organisation trade barrier most vulnerable to protectionist abuse. Says Chandrashekhar Dasgupta, former Indian ambassador to the EU, “This is protectionism, pure and simple. It is inconsistent with WTO regulations. There is no trade-related requirements in either the Kyoto Protocol or the Framework Convention on Climate Change”.
The EU climate change policy passed its last major hurdle when the EU Council broadly okayed the Commission’s policy in March. The next step is legislation. Rapporteurs have been appointed at the European Parliament and laws can be expected by early 2009. France, which holds the EU presidency, is gung-ho about the policy, says Kirkegaard — one reason being 80 per cent of its power comes from carbon-free nuclear power. Dasgupta notes Nicolas Sarkozy issued a warning to this effect during his recent visit to China.
Brussels’ decision to put the carbon tariff threat on the table is a “shot across the bow”, but something like this is “inevitable”, say those familiar with the EU’s official thinking. The idea is to scare countries like India and China into signing up for carbon curbs of the Kyoto variety and comparable to the commitments made by the EU. In India’s view, this is morally and economically questionable. There is a huge economic gulf between the two sets of countries. Eighty million Germans and 60 million Italians together generate as much carbon as 1.1 billion Indians. There is the additional problem that emerging economies are still undergoing an energy-intensive industrialisation process that is largely history for the West.
Brussels can rightly argue that modelling has shown that ‘carbon leakage’ — dirty economic activity shifting to less-regulated countries — would undo about 10 per cent of the EU’s carbon policy. But baser motives are at play as well. One, old economy Europe sees a chance to fend off competition from the developing world. The sectors identified for carbon protectionism are hardly cutting-edge: paper and pulp, chemicals, metals. Two, arm-twisting other countries to accept EU carbon standards gives European technology an economic opportunity. Barroso says this clearly, “We must not forget the huge economic opportunity represented by Europe’s transition into a low-emissions economy... The renewables sector alone will bring one million jobs by 2020.” He adds, “Europe can be the first economy for the low-carbon age: we must seize the chance.” Climate change seems to be seen as a way to reverse Europe’s decline. This is driven, says Dasgupta, “by the fact that the European and US economies are not going through an expansionist period”.
The Kyoto virus is spreading. The US Senate is awash with bills on how the US should tackle climate change. Almost all include provisions for carbon tariffs to be imposed on imports from non-Kyoto countries. The Lieberman-Warner Bill requires six types of energy-intensive imports to buy emission allowances in the US, a clause inserted at the behest of US unions and power industry. But the Bill sweepingly adds that Washington can add “any other manufactured product that is sold in bulk for purposes of further manufacture”. It is obvious China, with the world’s most dynamic manufacturing base, will suffer the most from carbon tariffs. However, India cannot afford to be sanguine. India is one of the ten largest exporters of steel to the US and a major exporter of chemicals to the developed world. Much of Indian industry is powered by dirty coal and would face proportionately high tariffs.
It is important to realise the threat Kyoto represents for India’s economic rise. India is experiencing a revival of the factory base ruined by a half-century of socialism. This assembly-line renaissance — and the essential role it plays in absorbing surplus rural labour — will be stillborn if new factories are unable to export or have to pay for green technologies sold at gunpoint. Putting together an alternative carbon emissions policy, one that is far more nuanced than the guillotine of Kyoto, and stitching up a diplomatic alliance of like-minded countries is now an imperative for New Delhi. The carbon trade wars are coming.