Furore over EU carbon tax plans

After the United Nations conference on climate change in Bali last December and in the run-up to its successor in Copenhagen to be held next year, countries are gearing up for the second phase of the Kyoto Protocol on greenhouse gases after 2012. The US, and President George Bush in particular, is determined to get major developing countries like China, India and Brazil to agree to some caps on their emissions of carbon dioxide. But these nations are equally adamant in refusing to do so.

And now comes a new twist. According to recent reports, the European Union is thinking of a carbon tax on goods imported from major industrial developing countries which have not agreed to cut emissions under the Kyoto regime. The EU regards this measure as a means of ensuring a level playing field by introducing a 'carbon equalisation system'.

Not to be left behind, the US Senate has tabled a bill known after its drafters, Senators Lieberman and Warner, along with other bills seeking to "protect" the US from those who haven't agreed to reduce their carbon emissions. Unlike the blanket EU proposal, the Lieberman-Warner bill is sector-specific, covering six types of energy-intensive imported goods.

Proxy trade wars

These protectionist measures have been prompted by US labour unions, which fear that their jobs will be at risk if energy-inefficient producers from developing countries are able to compete more successfully in the international market, since they do not have to install devices which reduce carbon dioxide. Power companies are also concerned that their future will be undermined by cheaper products from major industries in developing countries. The EU has specifically targeted paper & pulp, chemicals and metals, although the tax plan would apply to all or most imports.

The Indian government is not taking things lying down. Its representative to the World Trade Organisation (WTO), Ujal Singh Bhatia warned that countries will retaliate if such measures are introduced. On the face of it, these militate against the very concept of competition in trade. Officials from the Union Ministry of Commerce and Industry believe that this will feature as a major bone of contention at the Doha round of WTO trade talks this month. They add that representatives of Indian industry and other experts will also be consulted on how to challenge this move.

The Confederation of Indian Industry is compiling a report on what Indian industry has done voluntarily to cope with climate change. C. Dasgupta, who was the former Ambassador to the EU and now is an advisor to The Energy and Research Institute (TERI) in Delhi, clarifies: "This is protectionism, pure and simple. It is inconsistent with WTO regulations. There are no trade-related requirements in either the Kyoto Protocol or the Framework Convention on Climate Change."

Last September, when the UN Development Programme (UNDP) released its Human Development Report on the human impact of climate change, its lead author Kevin Watkins addressed a group of Asian journalists at Manesar, near Delhi and emphasised the need for India and China to agree to cuts in their carbon emissions after 2012. The report was to have been released a month later by Prime Minister Manmohan Singh in Delhi, but he was cautious about associating with a study that included such a finding, and he backed out. Eventually, after a great deal of controversy, the UNDP Resident Representative in Delhi almost disowned the report, claiming absurdly that it was "only a scientific study"!

This is not the first time that protectionist measures are being proferred in the guise of environmental laws. In the early 1990s, the US tried to block the import of Mexican tuna on the ground that the nets used by trawlers killed dolphins in the process. Mexico, which then exported some $450 million of fish annually, took the case to the Geneva-based General Agreement on Tariffs & Trade (GATT, the precursor to the WTO), which ruled that the US could not enforce its own environmental laws upon its trading partners. Instead, the US eventually compelled Mexico to enter into a bilateral treaty to abjure using these fishing methods, which many critics saw as a non-tariff barrier to imports and a protectionist measure for the US tuna fishing industry.

No free-loading

As is well known, the EU's post-Kyoto plan is the world's most ambitious one, although even this is far from being sufficient to avert a climate catastrophe. The plan aims to reduce Europe's carbon emissions by 20 per cent by 2020. But restraints on its own emissions are only part of the plan, EU decision-makers understand that they must get others to reduce their emissions too. Thus, as Trevor Houser, author of a forthcoming book titled Levelling the Carbon Playing Field puts it, "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."

A paper Houser co-authored with Daniel H Rosen on China Energy: A Guide for the Perplexed exactly a year ago, documents how US policy-makers are growing increasingly worried about China's apparently insatiable demand for energy. China bid unsuccessfully to take over Unocal, a US oil company, and has made big oil sector investments in Sudan, Iran and Venezuela. China has become a net exporter of energy-intensive goods and the US has been raising concerns regarding the subsidies given by China to steel - again with the level playing field in mind.

The authors write, "The concept of a carbon tax imposed by nations disciplining carbon emissions on imports from countries free-riding on those efforts, which was anathema to free trade thinkers a decade ago, is no longer seen as radical. While auditing the carbon content of a DVD player on the shelf at Wal-Mart all the way back through the production value chain is a daunting notion, such an approach, if addressed in a multilateral context, would have the benefit of harnessing market incentives, rather than elusive political will, to reduce energy consumption and carbon dioxide emissions."

The EU, which knows that it will run the gauntlet of challenges in the WTO if it tries to impose carbon tariffs on others, has been circumspect and refers to them as "border adjustment mechanisms". However, the EU Commission President, Jose Manuel Barroso, told the European parliament this January: "There is no point in Europe being tough if it just means production shifting to countries allowing a free-for-all on emissions." He made it clear that if major developing countries did not subscribe to a Kyoto II regime of restrictions, "we will look at other options such as requiring importers to obtain allowances, alongside European competitors."

This means that Indian and Chinese firms will have to buy carbon credits from Europe in order to export their goods there. At present, a certified emission reduction certificate of one tonne of carbon is trading on the international market at 15 euros. If and when Indian and Chinese firms have to buy these certificates some year after 2012, the price will likely be a multiple of this figure.

Developing economies protest

Developing nations argue that these plans are discriminatory. The main use of carbon-derived energy in the US and Europe is in buildings (heating systems) and for private transport, whereas in China and India energy is used in industrial production, which is vital to their growth, besides being a competitive threat to the old industrial societies.

Moreover, as developing nations see it, the industrialised countries have burned fossil fuels indiscriminately and brought the entire globe to the edge of peril. Therefore, justice demands that the industrial countries pay for their 'historical' emissions - the build-up of carbon dioxide, sulphur dioxide and other greenhouse gases in the atmosphere during 250 years of industrialisation. They also demand that rich countries should transfer clean technologies to developing countries at concessional prices, so that they are able to make the transition to a carbon-free system. This, the poor countries argue, is really what the level playing field ought to be.

These arguments do not absolve the developing economies of any responsibility for climate control. Indeed, sooner or later, India and China too may have to start reducing their carbon footprints. But, for the moment, they are insistent that this should only happen if those who have precipitated global warming in the first place are penalised for their actions - the well-understood 'polluter pays' principle - before others are brought into line.