Europe News

Europe's plans for a carbon tax could derail trade deal with the US

Key Points
  • The European Union is assessing whether to implement a carbon border tax, which would hit importers from countries that do not respect climate goals.
  • U.S. officials have already raised concerns about such plans, arguing they could hurt American businesses.
  • The EU and the U.S have been at odds over trade since President Trump took power in 2016.
Ursula von der Leyen, president of the European Commission, delivers a speech during a special address on day two of the World Economic Forum (WEF) in Davos, Switzerland, on Wednesday, Jan. 22, 2020.
Bloomberg

Just as one tax conflict seems to ease, another one emerges.

The European Union is assessing whether to implement a tax on importers from countries that don't match Europe's climate guidelines. U.S. officials have already raised concerns about such plans for a so-called "carbon border tax," claiming that it will hurt American businesses. Their latest standoff could hurt efforts to reach a U.S.-EU trade deal this year, experts told CNBC.

"The benefits of a carbon import tariff are clear. If domestic producers are hit by higher carbon emission prices at home, foreign producers should also be forced to de facto pay that price by a border tariff that equalizes the difference between the domestic and foreign price on carbon emissions. Otherwise, production would shift abroad," Holger Schmieding, chief economist at Berenberg bank told CNBC Monday.

The European Union announced in late 2019 new commitments to become more climate friendly. This includes asking European businesses to reduce their CO2 emissions through an emission tax. In order to compensate their efforts, Ursula von der Leyen, president of the EU's executive branch, said that business from other countries will have to take similar action domestically or face a carbon border tax when selling their products in Europe.

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"There is no point in only reducing greenhouse gas emissions at home, if we increase the import of CO2 from abroad. It is not only a climate issue; it is also an issue of fairness," European Commission President von der Leyen told the World Economic Forum last week.

However, U.S. Commerce Secretary Wilbur Ross told the Financial Times that the U.S. will take punitive action against the EU, if its measures proves to be "protectionist."

Lode van den Hende, an international trade law lawyer at Herbert Smith Freehills, based in Brussels, told CNBC that the protectionist nature "will depend on the design" of the measures.

The European Commission was not immediately available when contacted by CNBC about their carbon tax plans.

"It will not be easy," Eric White, an international trade lawyer at the same legal services firm, told CNBC over the phone.

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Any carbon tax plan will "need to be consistent with the WTO (World Trade Organization)", he said, "you need to treat everyone equally."

Speaking at a panel at the WEF on Friday, the U.S. Treasury Secretary said: "I don't think we know how to price these things."

"And if you want to put a tax on people, you know, go ahead and put a carbon tax, that's a tax on hard working people," Steven Mnuchin said to ECB President Christine Lagarde.

Carbon taxes are levied against corporations, rather than workers.

And they have support within the United States. Speaking last week, Al Gore, former U.S. vice president, said: "One way or another that's really what we have to get done."

Trade and tax

The latest standoff between the U.S. and the EU has emerged just a few days after tensions over digital taxation eased between the two.

France, who had implemented a digital tax in 2019, agreed to delay the first due payments until the end of 2020, while international discussions over such tax develop within the OECD (Organization for economic cooperation and development). In exchange, the U.S. agreed to suspend tariffs on French goods.

The EU and the U.S have been at odds over trade since President Trump took power in 2016. However, both announced last week renewed efforts to negotiate a new transatlantic trade deal before the end of 2020.

"The U.S. may oppose whatever the EU does on any issue of trade and regulations. In that sense, it may potentially complicate talks about a US-EU new trade deal," Schmieding said via email.

Carsten Brzeski, chief economist at IMG Germany, said it is hard to tell whether carbon taxes could hinder trade talks, but they will "definitely introduce another layer (to the negotiations)".

"The discussion on the digital tax already illustrated that trade talks these days are much more than talks on trading goods," he added.