The EU’s carbon tariffs

That is the topic of my latest Bloomberg column.  Here is one excerpt, starting with the basic idea:

Importers would have to register to receive authorization to import goods, and they would pay a tax per ton of carbon dioxide produced. These fees are intended to match those already applied within the EU, which are currently about 90 euros per ton. The policy is also intended to place EU industry on a more competitive footing and encourage foreign countries to adopt greener energy policies.

But will it work?:

But would it? Economic changes take place at the margin, and currently the EU is engaged in substitution toward coal, a very dirty energy source.

In light of that reality, consider the proposed tariffs as having (at least) two effects. First, they will push some production out of foreign nations and into the EU. Second, they will induce some foreign nations to move to greener energy sources over time, to avoid the tax.

In the short run, the first effect dominates: The tariffs will lead to more coal use and a dirtier energy supply.

Be suspicious of green energy policies which at first make the problem worse. However promising the longer-run promises may sound, there is always the risk that bureaucratic inertia will intervene and the short-run policy effects will dominate.

The rationale for the beneficial long-run effects of the tariffs is that foreign nations, including some relatively poor nations such as India, will move toward greener energy at a more rapid pace. That might happen. But look at the EU itself over the past year. Its energy prices went up, due to the Russian attack on Ukraine, but the EU did not move toward greener energy, such as more nuclear or wind power. It moved toward dirtier energy, in part because domestic interest groups opposed the more beneficial adjustments.

So, despite about as strong an incentive as possible — a war — the EU made the harmful rather than the beneficial adjustment. Now it is expecting that much poorer nations, often with worse governance structures, to do better. Not only is this naïve, but it is also protectionist.

And this:

Even the positive long-run effects are up for grabs. On one hand, the tariff hike provides an incentive to move toward greener energy. On the other, it makes the exporting nations poorer than they otherwise would be. Poorer nations tend to be less interested in improving their environments, as clean environments are largely a luxury good. And extreme poverty worsens other global problems, including issues stemming from migration. Should EU policy make it more difficult for Africa to industrialize?

One also has to wonder whether the promise of lower tariffs in return for greener energy is credible. Once protectionist measures are in place, they are hard to reverse. The EU would be reaping tariff revenue, and domestic EU industries would be receiving trade protection. Any reclassification of the imports as fundamentally “greener” would require an investigation across borders and clearance through multiple levels of bureaucracy. Such changes will not be easy to accomplish, especially in an era increasingly enamored of trade restrictions.

Worth a ponder.  EU coal consumption has been up over the last two years.  And what is relevant here is energy supply at the margin.