At Davos, EC President van der Leyen called for a border carbon tax on Chinese goods due to China’s “failure to price carbon”. In “Zero Carbon Our Choice” I review the issues with border tax adjustments (and there are many). These adjustments are not the panacea many claim and the complexity of introducing them will be enormous.
However, the issue which struck me about the proposal is that the EU is not a block when it comes to pricing carbon itself. Its own 2016 report states “The report illustrates that, under certain assumptions (in particular regarding the longevity of installed capacity), the EU power sector could evolve towards excessive fossil fuel capacity by 2030, compared with the optimal capacity levels in the Energy Roadmap 2050. The prolonged operation of inflexible, carbon-intensive power plants, along with the planned construction of new fossil fuel capacity, could translate into higher costs for decarbonising Europe’s power sector by locking it in to a dependence on a high‑carbon capacity.” https://www.eea.europa.eu/data-and-maps/indicators/overview-of-the-electricity-production-2/assessment-4.
The attached map from www.beyondcoal.eu shows that most of Eastern Europe is not pursuing the phase out of coal. Indeed, Poland generates 80% of its electricity from coal and lignite. Poland is not alone the Czech Republic generates over 70% of its electricity from carbon sources. In fact, China generates less electricity from coal than either Poland or the Czech Republic, China lowered the share of coal in its energy mix was 59% in 2018.
This causes a problem for the EU claiming a lead role in emission reduction. It has failed to persuade Poland to close coal powered generation. As a result, the EU will have a problem imposing a border tax adjustment on Chinese or other country goods. The obvious response would be to ask the EU to impose the same tax adjustment on goods from Poland within the EU (which it cannot do given the single market) and for China or another country to impose the same tax on goods from Poland, etc.
Indeed, one would have to question whether Germany which uses coal and lignite for 30% of its electricity production would be exposed to retaliatory measures by third countries if the EU introduced border tax adjustments (until its proposed phase out of coal by 2038)? The question would be which level of share of coal in Europe would trigger retaliation?
The EC needs to address these issues before it pursues border tax adjustments. It needs to recognise the risk of triggering a trade war over border tax adjustments while EU members still use significant proportions of coal in power generation.
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