The European Union is introducing a carbon border adjustment mechanism, an instrument that has been lauded by some as a much-needed stimulus for climate action and branded by others as a fast route to new trade wars between the bloc and its trading partners. As the EU is pursuing a higher climate-neutrality target and a green overhaul of its entire economy, the scheme, which has importers pay if their product has a higher carbon footprint than their European counterparts leaves many industries and non-EU governments concerned. Yet, Europe is set on decarbonising what is left of its energy-intensive industries while keeping them competitive at a global level. After months-long negotiations, EU institutions reached an agreement on how such a complex, politically contentious and legally delicate system can be gradually implemented beginning in 2023. This factsheet explains the design of the European carbon border levy, outlines the potential problems associated with this instrument and sums up the opinion of the stakeholders in and beyond Europe.
Also, of course:
Higher prices ==> Lower demand
Lower demand ==> Lost production
Same old, same old. Carbon has always been an economic issue. Carbon reduction is not free.
Its about who pays, how much, and how to collect until green energy is in place.
Carbon border tax will put the use of carbon free energy on a level playing field with fossil fuels.
This is an important step forward for Europe’s quest to cut heat trapping gas pollution. Without a border tax, or similar, it is impossible to impose restrictions or taxes on domestic industry without them being undercut by polluting imports.
Continue it …
Lower production ==> Lower emissions
That was never true in the US from 1981 to 2020. With lower prices we lost production. With lower prices we had lower demand. With lower demand production moved overseas.
Yet in the 1960s with higher wage growth and higher prices GDP growth was often much better. We gained production.
DB2 since you brought up the topic care to explain why supply side economics failed constantly?
I am not a fan of trade protectionism, which this ends up being. In addition it will certainly raise prices within the EU, slowing growth there and reducing their competitiveness and exports.
There is also what is called leakage. For example, there is a lot of steel that goes into an automobile. Currently, a company such as VW makes cars in Europe and ships them overseas. With higher steel costs in the EU there is more incentive for VW to build their next plant in, say, South Carolina.
From the WEF:
The idea of a carbon border tax has been discussed by experts for years. If designed unilaterally, it tends to be seen as unfair by trading partners. There is the risk that it becomes a protectionist device, unduly shielding local industries from foreign competition in so-called ‘green protectionism’…
For the EU, however, risk of “carbon leakage” required action, even if unilateral. In proposing a Carbon Boarder Adjustment Mechanism (CBAM) the EU claims to be concerned with the relocation of production to countries with less ambitious climate policies…
The EU’s CBAM proposal contains various controversial aspects. For example: how to fairly account for emissions related to the production of imported goods? How to duly consider the costs that companies already face in complying with climate regulations in exporting countries? The United States, China, India, Brazil, South Africa and several others, including least-developed countries, have expressed concern over the EU’s CBAM…
Trade specialists have been discussing the consistency of the EU proposed mechanism with multilateral rules. A WTO dispute against the EU is possible.
Leap, the relationship of supply and demand and prices is your basic supply/demand curve. You know, increased prices result in lower demand…
Nope. Nice try, though.
With the opening of China (they were smart, the West was NOT), Western mfrs saw an untapped mega-market of customers. Plus, China was offering a variety of direct and indirect subsidies to the companies that set up production in China. China had a massive group of new workers “coming of age” and there was no reasonable way to employ those workers in the normal China economy. So, China chose to create opportunities for Western companies to employ those (otherwise unemployed or vastly unemployed) workers by having the Western companies hire them to work on production in China.
This was critically important to China’s leadership. Guess who tends to be the revolutionary who leads massive change–members from that unemployed/underemployed age group. It is generally found many places around the world. China did NOT want to have a large group of people, 18-28 years old, with LOTS of idle time on their hands. That is the basis of revolutions. Keep them employed, occupied, busy–and they don’t have the time/inclination to undertake the major effort to revolt en masse due to the failure of the economy (which gave them the time to get together and plot to carry out a revolution).
By moving production to China, companies lowered costs dramatically (compared to the US)–and could sell at lower prices in other markets. It also gave them access to a new, previously (essentially) closed market–China. Plus, production from China could be sold in other countries because the shipping costs were also less. I know because I sold (in 1984-1985) capitol eqpt (“Made in USA”) to companies setting up production facilities in China. Almost got another deal done in the mid-90s, but the Japanese undercut any competition. They wanted to keep the Chinese market to themselves. Turned out to have been a letter-of-credit fraud scheme (by the Chinese company and their bank), so the pain from that problem was not ours.
Now, companies are fleeing China in order to find lower labor costs, locate closer to new-and-fast-growing markets, etc.
I’m also not a fan of trade protectionism, but I’m not voting in Europe, they are. And that is EXACTLY what they are choosing! They WANT higher prices/lower consumption, leading to lower growth/lower emissions, etc. At least during the period while clean energy prices approach dirty energy prices.
Yes, of course. There is more than one incentive to do so, for example, the USA style of trade protectionism (large tax credits only for locally produced vehicles).
But if they ship vehicles from South Carolina to the EU, the additional carbon tax will be due.
That is not supply side economics. I was asking about how supply side economics made this work. Do you know what supply side economics is?
Proving my point. Thanks.
Meanwhile automobiles made in Germany and Japan the labor was more expensive than Detroit all in per worker yet the US lost market share internally and globally. German and Japanese car manufacturers gained market share.
Yes the results in Japan and Germany were demand side econ driven and the US results were supply side econ driven.
No manufacturing is coming back to the EU and US/Mexico. Higher costs are not the issue. Higher taxes on corporations and the top income bracket make expensing costs in the US a better option. It comes off their taxes. As opposed to lower taxes building a factory in the US when taxes are low means the expenses come more out of the profits. Plus the US is gearing up the infrastructure as a key part of central planning with a lighter touch to facilitate production here. The expected economies of scale have US manufacturers returning to build factories here.
Meanwhile China still has cheaper labor. But as someone 25 years ago in Pratt and Whitney management told me, in a business such as Pratt’s labor is not a big issue.
If labor for a US corporation matters in a low value product it will be produced in Mexico.
Leap, you wrote “DB2 since you brought up the topic care to explain why supply side economics failed constantly?”
I didn’t bring up supply side economics, and no, I don’t.
Higher prices means profits. Profits mean greater production. Turned into lower prices and more demand. We just saw that in the production cycle out of China. We can see that in the production cycle out of the US and EU.
What you added is a worthless supply side economics mantra. It is not true. It was to a degree true in the 1970s because of some of the conditions of labor. It is not true today. It was not true in the 1950s into the mid 1960s. Less the labor in the 1970s input costs were rising while interest rates were not decided by market forces.
There are times in the cycle where there is a truth to it. There are are more times in the cycle where it is a very small factor. Currently it is not a factor no matter who cries wolf.
Doesn’t matter. The bean counters look at profit (in all forms–not just a single number), then compare that figure for each possible production location. Everything else is irrelevant.
You realize you did not say anything? Except it doesn’t matter?
I was discussing the bean counters’ choices of IRR and expensing factory costs against taxes. Since factories are going to be built it matters how high taxes are. It is counter intuitive that higher taxes in the US beget more factory construction in the US. I spelled that out.
We are talking US corporations that are more dependent on US consumers than on Chinese consumers. The shift to build in the US is happening for many reasons. Chief among them expensing the costs of the build out.
No crap bean counters count.
Taxes are an expense–like any other expense. It, with other expenses, is subtracted from Gross Profit to get to Net Profit. Whatever location maximizes Net Profit is their choice.
…the CBAM is part of Europe’s climate diplomacy and, even before a proposal has been adopted, observers credit it with having helped change attitudes towards climate action in other countries
Oh my, they actually think virtue signalling changes the opinion of other countries.
The new bill will be the first of its kind. It is designed to be in full compliance with World Trade Organisation (WTO) rules
They’re afraid of the WTO? The level of naiveté and insecurity here…
Also, what was the European Parliament’s vote on this sweeping legislation, for and against?
That is not true to any accountant or any economist. Taxes owed can be lowered by deducting expenses. The higher your tax rate is the more you will expense so as not to pay the taxes instead.
Jerry stop arguing for the sake of arguing. There is a ton of proof that higher taxes means a much faster GDP growth rate based on this.