Border Carbon Adjustments – Tariff Reform for the 21st Century

There is a radical idea doing the rounds.

So radical in fact that in years gone by, earlier forms of the idea have brought down governments, destroyed political parties, even brought the country to the brink of civil war.

It’s explosive stuff.  Political dynamite.

Being too technical to fit into an abusive UKIP tweet means it has passed the local elections by.

But if the Kippers only knew it was about a fundamental reshaping of our trading relationship with, not only the EU, but the rest of the World, they would be onto it before you could say “loonies, fruitcakes and closet racists”.ukip-caandidate

The idea is Border Carbon Adjustments.

Essentially, the concept involves putting a tariff or tax on any goods that are imported into the country from jurisdictions that have less stringent carbon emissions legislation.

The logic is that if Britain (or the EU) subjects its internal manufacturers to costly environmental legislation, foreign entrants into our market should be made to make up the difference in production costs with a tax on arrival.  The result would be that goods within the UK or EU market (depending where the tariff was levied) would compete on a level playing field in terms of carbon/environmental costs.

The principal cheerleader of the idea in the UK is the economist/energy policy guru Dieter Helm of Oxford University.  He originally generated quite a bit of interest with his paper published jointly with Cameron Hepburn and Giovanni Ruta in May 2012: Trade, Climate Change and the Political Game Theory of Border Carbon Adjustments.

Now the idea has received some weighty backing in the form of the Committee on Climate Change’s April 2013 Report: Reducing the UK’s Carbon Footprint and Managing Competitiveness Risks.

This report was widely covered in the press last week as it reached the conclusion that when ‘offshored’ emissions are included, the UK’s carbon footprint has increased in the past 20 years.  However, less widely trailed was the backing for Border Carbon Adjustments (BCAs) as a means by which the UK could manage the levels of carbon infused goods being imported.Products-TradeIQ-Container-Ship

Of course, the CCC makes it clear that a global deal to sign up all countries to carbon reduction targets is preferable to BCAs.  It is also suggesting that BCAs would only be a temporary solution.

However, the open discussion of imposing BCAs as a protectionist measure to achieve environmental outcomes by such a prominent advisory body is hugely significant.  As Helm points out in his paper, the dispute over the entry of aviation into the EU ETS (essentially imposing a BCA on any flight coming into the EU) had brought the issue into sharp focus.  Since the EU suspended that measure, there was a chance that the idea would have gone away.

The CCC’s report puts it firmly back on the table.

The political ramifications are fascinating.

On a conceptual level, border tariffs will cause huge difficulties for free-trade supporters, meaning (at the very least) every major political party in the UK.

More broadly, if applied internally, BCAs cut across the entire European project.

On a more practical level, if applied at an EU level there would be implications for every trading relationship the bloc has, including the trade agreement the EU is currently negotiating with the US.USA_EU_FTA

The CCC recognises these problems with the understatement of the report:

“Sector agreements and border carbon adjustment could provide stronger incentives for reducing emissions than allocation of free allowances, but are likely to be both technically and politically difficult to agree and implement”

So the idea is a non-starter?

Perhaps not completely.  Both Helm and the CCC are turning to BCAs because the current round of negotiations on a new climate treaty have progressed depressingly slowly.  Progress is now unlikely until 2020.

At the same time economic growth in the UK and EU is likely to remain sluggish. While our commitment to environmental objectives remains (the commitments in the UK are set in statute) there could be opportunities for politicians to begin to unpick the free trade straight-jacket that potentially undermines domestic manufacturing competitiveness. Tariffs also provide a welcome source of new revenue, without (directly) taxing citizens.

So it’s a discussion that could develop.  And, though it may seem academic, history tells us that when debates on tariff reform get going, they tend to get interesting.  The Corn Laws brought about some of the most significant reforms of the 19th Century.  Tariff Reform tore the Unionists apart between 1903-06.corn_laws

If one of the political parties took a risk on Border Carbon Adjustments this apparently techy idea could get very interesting.

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