Perhaps no other area of carbon emissions regulation is more confusing and fraught with difficulty than a so-called “carbon tariff.”

What does the term mean? In general a carbon tariff is a duty that would be applied to goods imported into a country (be it a country, such as China, or potentially even a specific manufacturer) that has not done enough to reduce its own carbon emissions versus the efforts/regulations of the importing country.

That means the cost of the imported good will rise by the amount of the tariff. This import tax might be enacted for one of at least two reasons: 

1. If a country believes its manufacturers would be at a cost disadvantage versus importers because they have invested in carbon emissions technology or processes, or face the costs of some kind of carbon tax. A carbon tariff would serve to “level the playing field,” and protect domestic manufacturers.

2. The tactic might also provide useful to force countries that are perceived to have not taken much action on emissions to move in that direction and thus eventually have the tariffs removed.

In a speech last September, French president Nicolas Sarkozy said "I'm in favor of environmental protection but I want to keep our industry."

He further vowed to "lead the battle" against cap-and-trade or carbon tax systems in which European countries impose constraints on their industries for climate protection, while allowing imports to continue from countries that do not respect the same rules. (See French President Plans on Carbon Taxes - and Tariffs.)

The Green Supply Chain Says: The Institute for International and European Affairs proposed that the European Commission should “immediately begin the process of bringing forward proposals for carbon tariffs of up to 9%” on imports from countries that aren’t matching EU efforts. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

In Spring of 2009, US Energy Secretary Steven Chu said that the US is open to the idea of imposing carbon tariffs on imports.

Just recently, the Institute for International and European Affairs proposed that the European Commission should “immediately begin the process of bringing forward proposals for carbon tariffs of up to 9%” on imports from countries that aren’t matching EU efforts.

Meanwhile, the Chinese government two weeks ago began discussing the possibility of an internal carbon tax for high carbon emissions industries such as high tech, in part to sidestep the possibility that its industries would be hit by carbon tariffs from Western countries, according to Jia Kang, director of the Research Institute of Fiscal Science with the Finance Ministry.

Last week, influential New York Times columnist Paul Krugman, a Nobel Prize winning professor at Princeton, also called for a carbon tariff against China and other developing countries.

“Sooner than most people think, countries that refuse to limit their greenhouse gas emissions will face sanctions, probably in the form of taxes on their exports,” Krugman wrote. “They will complain bitterly that this is protectionism, but so what? Globalization doesn’t do much good if the globe itself becomes unlivable.”

Two weeks ago France – for now – said it is abandoning its own plans for a carbon tariff, saying it didn’t want to go it alone, but Sarkozi last week reiterated his called for a European Union-wide tariff program be enacted.

Questions and Barriers

For now, most of the discussion around the potential for carbon tariffs seems to be at an individual country level. In other words, even if a given Chinese manufacturer ran a highly Green, low CO2 factory, its products would be subject to the tariffs because the entire country was being penalized.

That means that the tariff likely would be applied even for imported products from a company’s own factories in offshore locations, though it is possible that that there would be some kind of “duty drawback” provision to mitigate that cost.

The complexities of managing a tariff at a company or factory level, though perhaps more fair, would seem overwhelming.

Another question is whether a carbon tariff would violate World Trade Organization rules.

Many observers say yes, claiming such a policy would be WTO-inconsistent because it violates the Article I MFN principle of the General Agreement of Tariffs and Trade, which basically means members are not allowed to treat each other unequally, as would be argued if a country or block of countries decided to levy a carbon tariff on some nations but not others.

However, the Global Policy Memo, which provides commentaries on a variety of global business and legal issues, says that the US or others implementing a tariff would probably invoke an Article XX(g) defense, which provides an exception for measures “relating to the conservation of exhaustible natural resources.”

“The exhaustible natural resource in question is carbon-free atmosphere–this might sound implausible, but the Appellate Body in U.S. - Reformulated Gasoline did actually rule that clean air is an exhaustible natural resource, so it might very well rule that carbon-free atmosphere is as well,” the Global Policy Memo analysis says. “The U.S. might also argue that its natural resources might be threatened by the effects of global warming - for example, if its lumber supply would be reduced because its trees cannot survive in a warmer climate - and thus those exhaustible natural resources are also at play.”

However it is pursued, carbon tariffs will have a significant impact on global trade and supply chains – it’s best to start getting knowledgeable and prepared.

What are your thoughts on Carbon Tariffs? Good idea or bad? Do you think it can actually be managed well, and what would be the impact on supply chains? Let us know your thoughts at the Feedback button below.

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