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The UK and EU – and potentially the entire G7 – are on a collision course with Australia over trade measures to tackle climate change.

UK Prime Minister Boris Johnson is considering brokering an alliance among G7 members for coordinated action on carbon border taxes, according to his Business Secretary Kwasi Kwarteng.

The UK is soon to be holding both the G7 presidency as well as playing host to the UN climate change talks in November. 

Johnson has said he wants to make cutting emissions a key priority for post-pandemic recovery efforts, and carbon border taxes are one of four key areas he wants on the table.

“There will be a discussion about carbon border adjusting, carbon leakage,” said Kwarteng. “That has to be part of the multilateral discussion.”

The other focus areas for the UK’s COP26 leadership will be green finance, the phase-out of coal, and helping poorer countries to step up climate action.

What are carbon border taxes?

Carbon border taxes are tariffs on goods imported from producer countries with weaker climate laws, and to protect their industries from being undercut by rivals in countries that have no carbon taxes – such as Australia.

The idea behind them is to encourage other countries to match the legislation of the UK and the European Union, which require their most polluting industries to reduce carbon emissions or pay taxes.

Plans for the UK’s policy are still in their early stages and proposals are yet to be agreed. A text would most likely allow for an agreement in principle, rather than a binding commitment, according to a Bloomberg report.

The UK unplugged

Since leaving the European Union, the UK has set the most ambitious carbon cutting goals among developed nations and is introducing its own internal carbon market after leaving the European Union’s own emissions trading system. 

Plans for a general UK-only carbon tax were apparently ditched earlier this month by Johnson following an outcry from food suppliers afraid of the effect on retail prices and competition from abroad. 

Carbon pricing has already had the effect of driving coal out of the UK power generation mix. 

The deputy president of the national farmers union commented on the plans when they were first announced that, “A carbon tax will not have the desired effect if it is implemented in the UK alone. 

“It is essential that any tax is internationally recognised, otherwise UK farmers will be put at a competitive disadvantage, outpriced by food imports with a higher carbon footprint.”

Hence the push to get all countries to agree to go net zero using the threat of an import carbon tax.

The EU’s carbon border tax

The European Parliament’s environment committee voted on February 5 on a resolution urging the European Commission to put a price on imported embodied carbon. Revenues from it will be used to replenish the EU budget and finance the bloc’s green transition, senior officials have said, as well as pursuing environmental objectives to comply with WTO rules.

“A carbon border adjustment mechanism should cover all imports, but as a starting point, already by 2023 it should cover the power sector and energy-intensive industrial sectors like cement, steel, chemicals and fertilisers,” reads their judgement

“It is a major political and democratic test for the EU, which must stop being naïve and impose the same carbon price on products, whether they are produced in or outside the EU,” said Yannick Jadot, a French lawmaker who was the parliament’s rapporteur for the resolution.

The levy will “ensure the most polluting sectors also take part in fighting climate change and innovate towards zero carbon,” said Jadot, who represents the Green political group in Parliament.

Global trade rules

Any carbon border tax would have to comply with World Trade Organisation rules, so Australian producers would be subject to the same carbon limits as those from the EU and UK to “prevent discrimination between foreign and domestic products”. 

The carbon border tax is likely to incentivise EU and UK producers to go carbon neutral – and those Australian exporters wishing to trade there or risk being subject to the levy.

The EU’s final plans are due to be announced in June, around the time scheduled for a meeting of G7 leaders in England.

Morrison is desperate to protect the Australian coal industry. He is due to attend the June G7 meeting. 

South Korea and India are also invited – and the same trade terms would have to be extended to them.

What of the other G7 members? 

Germany, Italy and France are members of the EU. In Canada Prime Minister Justin Trudeau plans to increase its carbon price. Japan is currently undecided.

Johnson hopes that the USA under President Biden will be supportive of collective action to tackle climate change amongst the G7. US Treasury Secretary Janet Yellen indicated support for a price on carbon before taking office.

Morrison will have his work cut out.

Taxing imported electricity

For the UK there will be will price implications for its electricity imports and exports. And even the Centre for Policy Studies, a conservative think-tank, is proposing a carbon border tax to tackle the carbon burden of imported electricity.

Currently the country is increasing the number of undersea cables linking its electricity grid to those of neighbouring countries allowing it to purchase or sell electricity according to price and need – which may or may not be generated by coal.

Eamonn Ives, a researcher at the Centre for Policy Studies, wrote last year: “Applied to electricity imports, the tax would be levied on the basis of the exporting state’s electricity generation mix and its respective carbon intensity. For a country like France, which generates much of its electricity from nuclear power, the tax would be relatively low. For one like the Netherlands, which won’t phase out coal until 2030, it would be higher.”

David Thorpe is the author of ‘One Planet’ Cities: Sustaining Humanity within Planetary Limits and Director of the One Planet Centre Community Interest Company in the UK.

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