The debate about the necessity to introduce a European border adjustment tax or border carbon tax heats up. Today two interesting contributions highlight some of the elements of the interesting debate.

A Financial Times’ editorial calls it the “easy way” to start “the biggest trade war since the Great Depression”. The author of the article puts forward two arguments to make his case:

First, it is not easy to estimate the extra cost that, say, a cap-and-trade scheme imposes even on a domestic company. And given disaggregated supply chains, it will be all but impossible to calculate which country added which bit of the overall carbon content of the end product, and hence what the weighted average final tariff should be”. Seems a good argument indeed to me.

Second and more interestingly: “it is far from clear that carbon leakage is a serious problem. Most studies show some impact, though not a huge one, on very energy-intensive industries such as paper, glass and steel, but little effect on the economy as a whole. This is worth neither starting a trade war nor imperilling the future of the environment about”. OK that’s what I thought but then we also do not need all the free allowances the EU wants to give to these industries in the first place. I wonder what Business Europe will think about this FT position 🙂

The second contribution comes from the excellent VoxEU blog where a series of high-level EU economists comment on policies. In it, CEPS’ (Centre for European Policy Studies) senior economist Daniel Gros defends the idea of a border tax, not to “’level the playing field’ for EU industry but to protect the global environment” and improve global (versus national) welfare. The article is a bit technical but the main policy recommendations are sound and attractive:

The economics of a carbon import tariff is clear. The politics is rather messy. A massive increase in EU tariffs against developing-country exports would certainly make them feel disadvantaged. While global welfare would increase, they might lose. However, there is an easy way out of the political problems. The EU could simply promise to use the proceeds from the tariff to help poorer exporting countries reduce the carbon intensity of their economies.”