Across The Carbon Border

Craig DalzellLet me tell you about the biggest policy campaign that Common Weal won without us actually fighting for it. Last weekend, the European Union launched the first phase of its Carbon Border Tax designed to deincentivise imports of goods that produce a lot of pollution in their manufacture in a time when EU countries are transitioning to a less polluting economy.In 2019, the Common Weal team had an all day meeting to discuss the development of our Common Home Plan – a Green New Deal for Scotland. Amongst the policies up for discussion was one that we were building into our trade and industrial policy. You see, we knew that the Green transition was going to be expensive – worth it in the long run, even on cost, but it would involve a lot of upfront investment. This meant that, for example, if we demanded that Scotland regulated to ensure that all steel production was made using zero-carbon methods then Scotland may become vulnerable to cheaper steel imports manufactured by countries that had not or would not transition. I say “cheaper” but, of course, this just means that the companies producing steel in the traditional carbon intensive way were and are receiving an effective subsidy in the form of not having to pay for their own pollution and the damage it causes. A subsidy paid for by all of us, no matter where we live or even if we buy the steel.The obvious solution is some form of trade tariff – unpopular in these days of globalised trade but still in place (otherwise we wouldn’t be talking about Freeports) albeit used more for profit, political and diplomatic purposes than environmental. Strictly speaking, our plan wouldn’t just apply to imports, it would apply to all goods sold in the Scottish economy – it’s just that we’d also regulate GND standards on our own goods so they wouldn’t pay the tax. But once done, the idea would be that the tax would bring the cost of any product imported to Scotland that is subsidised by some kind of pollution “externality” such as carbon, soil erosion or even things like poor workers’ rights elsewhere would be taxed at the border so that it was at least price parity with similar goods produced in Scotland to our Green New Deal standards. Countries exporting goods that meet or exceed our standards would be imported tariff-free and we could go on to form trade blocs of “coalitions of the willing” on climate change mitigations to apply pressure on those dragging their heels.It was an idea that we thought was going to be a bit too radical even for us. Could we get away with trying to overturn the great shibboleth of Globalism? Would critique of that pillar of “free trade” overshadow everything else in our Plan?We stuck with our convictions. We weren’t going to drop a policy we thought was the right thing to do just because we might get a bad headline from someone who probably doesn’t agree with us already and probably profits from causing the problem we’re trying to solve. But we were still a bit concerned about ‘selling’ the idea to the public.We needn’t have worried. In 2021 I was an expert witness to the Scottish Climate Assembly and presented this idea as part of our package of industrial and consumer policies. You can watch that speech here.https://youtu.be/7n3xEQaHpBs?t=196What I unfortunately can’t share is the two full days (themselves a subset of several weeks of just as intense debate with other groups of experts) of the most wonderful lesson in public policy development I’ve ever been involved in where a demographically weighted and representative sample of the people of Scotland debated the ideas they had seen, pulled in the experts to asked questions or get clarity on various points. The final report should be held up as a shining example of what the Scottish public are capable of if only given the chance by our politicians. It definitely doesn’t deserve to be almost entirely ignored the way it has.In that report, of all the policies from the radical to the mundane-but-necessary, it was a slight surprise to see the idea of an environmental import tax make it into the final report. What absolutely knocked me over those was that 94% of this demographic representation of Scotland supported policies which de-incentivised imports over green domestic manufacturing and 77% were in favour of carbon taxation of goods sold in Scotland no matter where they are manufactured. Those are polling numbers that you’d struggle to reach if your question was “Are puppies cute?”.But, as I say, with the exception of a bit of investment in Tool Libraries and the reluctant post-hoc adoption of Alex Rowley’s PassivHaus Bill (as exciting as these both are – particularly the latter), the Scottish Government ignored or outright dismissed most of the ideas the Assembly provided.On the carbon tax specifically, they simply said that they were unable to produce a national carbon tax within the powers of devolution (they did not address the possibility that such a tax could be controlled by Local Authorities).So that was that...except for movement in that trade bloc we used to be members of.The EU Carbon Border Adjustment Mechanism is the world’s first carbon trade tariff. Like a lot of EU policy, it’s insufficient, it’s the product of a lot of compromise, it only covers a limited range of the problem (carbon, not all externalities) and it is still a market-based solution but it’s a massive leap forward and is precisely the kind of policy that the EU would have almost certainly been incapable of delivering had Brexit not happened as the UK would have almost certainly tried to kill it or compromise it to the point of uselessness (witness the UK’s energy windfall tax that can be avoided by promising to drill more oil…)The short version of how it works is that the EU sets a price on a tonne of carbon emitted during the production and transit of goods imported into the EU. If that price is equal to or higher than the price already paid by the exporting country in their own domestic legislation, then they don’t pay any additional fees but if the price already paid is lower, then the EU will collect the balance up to their price floor. The first phase of the tax covers extremely emitting products like cement, steel, fertilisers, (fossil-fuel) electricity and hydrogen. The price of each tonne of CO2 will be set by a weekly auction. As of the time of writing the latest auction prices were around €80/tonne_CO2.This is still quite a low price (the “true price” of a tonne of emitted CO2 in terms of the damage it causes to the planet could be more than double that) but it’s higher than most current benchmarks around the world.Back in the UK though, Rishi Sunak is determined to go full climate denial and is talking about cutting or dropping environmental taxes completely so he can try to win votes ahead of the upcoming General Election. This has caused a slump in industry confidence in the UK and has caused the UK’s own carbon emissions market price to collapse to just £36/tonne (€41.50/tonne). Before April 2023, it was trading at around £75/tonne (€86.50) - a little higher than the current EU rate.Remember the purpose of the EU’s border mechanism. If the price of carbon already paid by the time it reaches the EU border is lower than the EU CBAM rate, then Brussels collects the difference. Rishi Sunak hasn’t cut the price of steel, fertilizers and other exports to the EU by cutting the cost of environmental pollution, all he’s done is change which tax collector gets to keep the money. His climate denial will result in a subsidy from British manufacturers, to the EU. Something I’m sure will go down really well amongst his Tory donors in the manufacturing sector.This is the lesson for Scotland. We can either be ahead of the curve on climate transition or we can be left behind by others. The ‘radical’ ideas of 2019 became the ‘normal’ ideas of 2021 and have become the ‘already happening’ ideas of 2023. I would have loved to have told you today that a Common Weal campaign on a carbon border tax had resulted in Scotland pushing ahead with the climate leaders of the world like the EU. As it is, it looks like we’ll be held back by climate deniers in the UK and some of our major exporting goods will face a tax barrier that will subsidise public services in Europe rather than here until we can catch up with our green transition to avoid the tax. The point of our policy was to use trade policy to drag late-comers into the climate future. I just hoped that Scotland wouldn’t be the one being dragged.