Friday, March 29, 2024

EU imports tax: threat or opportunity?

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New Zealand farmers have been quick to claim world champion status for carbon efficiency. So why are they so nervous about a planned European tax on the carbon emissions of imports? Nigel Stirling reports.
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It has been described by the European Union’s top bureaucrat as the continent’s “man on the moon moment”.

An ambitious plan to decarbonise the European economy known as the “Green Deal”.

“The goal is to reconcile our economy with our planet,” European Commission president Ursula van der Leyen boldly declared when first revealing the plan in December 2019.

European politics has been likened to an episode of Grand Designs but with the cast of the Sopranos: lofty ambitions backed by charming menace.

The Green Deal’s lofty ambition is to cut greenhouse gas (GHG) emissions 55% below their 1990 levels by 2030, greater than the 40% previously aimed for.

But European businesses are concerned such ambitious targets will make them uncompetitive against imports from countries not doing as much to reduce emissions.

Known as carbon leakage, that’s something the EU is keen to avoid.

That’s where the menace comes in.

A key feature of the Green Deal is a tax on imports the EU plans to use as a cudgel to bring climate laggards into line and level the playing field for European businesses forced to buy carbon credits to offset their own emissions, when most of their trading partners aren’t.

Details of how the so-called border carbon tax will operate are due by June.

The European Commission says it is likely to start in 2023 with imported competition from high emissions sectors such as cement, steel and aluminium.

However, last month, while the European Parliament’s environment committee backed the border tax, it also called for it to cover all imports into the EU.

Crucially the committee also echoed the EU Commission when it said the tax must comply with World Trade Organisation (WTO) rules and not stifle competition from more efficient producers.

But that’s easier said than done.

A source close to the Beehive believes old habits die hard within the EU and no matter its good intentions, a carbon border tax would be open to abuse.

“If I put that alongside the last 30 years of experience with the EU, you would have to be pretty worried that they would find a way to use this additional tool to protect some of their weaker industries and obviously agriculture is one of those,” the top-level source said.

NZ will argue strongly its farmers should be given credit for carbon efficient production.

“What we want to see from the EU is that those who have made real commitments and are really doing things in this space – as we would argue we are – are exempted or face a reduced tax,” they said.

Interestingly, NZ was not among a dozen WTO countries in November to question whether the carbon border tax was more about the EU protecting its domestic industries and raising revenue to fund its recovery from the pandemic.

The devil will be in the detail, according to a trade lawyer, who says whether the measure is a threat or an opportunity for NZ will depend on how the EU accounts for the emissions of the products it imports. 

If the EU is as good as its word, the tax will comply with WTO rules on national treatment.

Set out in Article 3 of the 1947 GATT agreement this prohibits taxes, laws, regulations or any other requirements giving protection to domestic industries at the expense of imported competition.

In practise this would mean the EU tax on the carbon emissions of imports must not be greater than the carbon credits EU producers have to buy to offset their own emissions when making like-products.

“So, if you have lamb in France being taxed at a certain level, then the point is to make sure that NZ lamb faces the same tax,” Chapman Tripp trade law consultant and former trade negotiator Tracey Epps said.

If that sounds complicated, it’s because it is.

Multiplied across the many thousands of products imported into the EU, each with unique emissions profiles, and every one to be authenticated before being signed off by EU customs authorities, it sounds like a bureaucratic nightmare.

Epps says it will be tempting for the EU to tax imports according to the emissions of the product’s country of origin, rather than the exporting industry or the exporter or product itself.

While administratively easier, such a system risks WTO lawsuits from trading partners.

“If you had done it on a country-by-country basis, rather than product-by-product, then you would imagine that some of the imported products would have been taxed in excess of the domestic-like product,” Epps said.

Dairy Companies Association executive director Kimberly Crewther says she had seen little to indicate agriculture would be subject to the EU’s border carbon tax initially.

Nevertheless, EU agricultural emissions had been rising at a faster rate than those from other sectors and this was putting pressure on its farmers to be brought into the EU’s Emissions Trading Scheme (ETS).

Once European farmers were forced to buy carbon credits to offset their emissions they would be likely to strongly lobby for imports not facing the same carbon costs to be subject to a border tax, so they were not left at a competitive disadvantage.

For that reason, the NZ dairy industry was watching talks in the EU closely.

Crewther says a border tax based on national emissions of the imported product’s country of origin was a non-starter for the NZ industry.

Such an approach risked squeezing out relatively efficient producers in high emissions countries and incentivising higher global emissions overall.

“There is a risk that because of the complexity that people will look to simplify and that is where you can get some of the perverse outcomes,” Crewther said.

“Those producers … their efficiency of production is what you want to be encouraging through your climate policies not penalising.”

While she did not say it, Crewther may have had NZ dairy farmers in mind when making those comments.

Although a recent industry-commissioned study found NZ farmers to have the lowest carbon footprint of any milk producers in the world, the country’s overall emissions record is less flattering.

According to the United Nations Framework Convention on Climate Change (UNFCCC), NZ’s increase in emissions since 1990 was the second highest of any industrialised country.

Crewther says the temptation will be for countries to put their own interests first and the climate second when designing carbon border taxes.

“What that highlights is the need for an agreed global mechanism,” she said.

But even if agreement can be reached between countries to calculate border carbon taxes based on emissions of the individual product, rather than of its country of origin, consensus still seems some way off on how to account for those individual emissions and from livestock in particular.

Ben O’Brien has been at the forefront of that debate as Beef + Lamb NZ’s (B+LNZ) representative in Brussels.

He says it has not been an easy matter to get agreement on.

“It is easy for cement and steel. Everybody knows how they are manufactured and their emissions,” O’ Brien said.

“But the fact is that people are producing agricultural products in all kinds of different climates and raising animals with all sorts of different inputs.

“It is not the same one-size-fits-all sort of game.”

B+LNZ will publish research later this month showing the carbon footprint of NZ sheep farmers to be the lowest in the world.

Despite the parochial result, it is hopeful of international support for the research because it accounts for carbon storage in farm soils and vegetation, which most international farming groups agree has been understated when calculating net emissions from livestock.

While the research will be sent to global bodies working out how to properly account for GHG emissions, that work was still at a very early stage for agriculture, O’Brien says.

In the meantime, he expected the EU to push ahead with its border tax.

“A lot of the people who are proposing these things have no idea of the complexity of coming to some kind of reasonably agreed versions of methodologies in things like agricultural products,” he said.

“Whether they will hold off until everybody agrees, I suspect they will not.

“In the end it is going to be very imperfect and there will be a political judgement from the Europeans about how imperfect they can get away with.

“It has all the makings of a fine trade barrier.”

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