There has been a lot of discussion over the last month or so about carbon cap and trade in the US. The “American Clean Energy and Security Act,” also known as the “Waxman-Markey bill,” was approved by the House on June 26. So it is interesting to compare what Europe, that more social leaning tax loving part of the western world across the pond is doing in the same area. You won’t be surprised to hear Europe has had a cap and trade system called the EU Emissions Trading System (EU ETS) in place for four and half years. Officially it is hailed as a considerable success in introducing a system at comparatively low cost (to industry) that will evolve over time into a more robust program to dissuade and limit carbon emissions. Many feel it is so riddled with loopholes and exemptions that it is no more than a windfall for many of the EU’s biggest polluters. To quote the NY Times, Much of the cost of the European system is being paid by the public in the price of goods and services, including higher electricity bills, but whether the money is doing any good is an open question. The amount of carbon dioxide emitted by plants and factories participating in the system has not fallen. Their emissions rose 0.4% in 2006 and another 0.7% in 2007. The greatest problem was permits were given away instead of sold and worse still industry was given 3% more permits than they actually needed. That is being tightened now but there is still intense lobbying by states that use a large amount of coal like Poland, as there is by Virginia in the US, to have their power industry exempted in some way. And that’s the nub of the problem, we live in a global market, if Europe makes it’s cap and trade laws too stringent it will disadvantage domestic producers and advantage suppliers from countries that have no carbon taxes ” like China, India, Russia and so on.
So it is interesting to read some of the comments made by the French President Nicholas Sarkozy this week when he discussed plans to introduce a separate French carbon tax next year. Possibly in an effort to make it more palatable to domestic voters he suggested France would apply a carbon tax on all imports in proportion to the energy required to manufacture them. Such an import tax would particularly hit steel and non ferrous metals like aluminum. Needless to say, it has raised howls of protest from some quarters as an example of rampant protectionism and may be with some justification because essentially the French Carbon Tax is largely just a fuel tax. It was originally proposed as Euros 14.00 per ton but now settled at Euros 17 per ton of carbon emitted, this will equate to about US$25/ton or rough US$ 0.18 per gallon of fuel. As France generates some 90% of its power from nuclear energy, French industry would only face a nominal burden by increasing transportation costs, the vast majority would fall directly on the general public. So why would a carbon tax on all imports at the border be necessary would you ask if French industry isn’t going to suffer significant cost increases? Well, that’s a good question. It illustrates the dangers of a piecemeal application of carbon taxes by countries. The temptation to not disadvantage domestic producers is so great that resorting to some form of protectionism is almost irresistible even by free market economies. For those like France that have had a history of protectionist tendencies it sounds like an excuse that is almost too good to be true.