How can the EU set a carbon tax at a rate that contributes to net zero? The European Commission is holding a meeting in June that is, on the face of it, very boring. The EU’s senior bureaucrats will be considering at what level to set a tax on carbon emissions for goods imported into the bloc.
Yet the consequences will be pivotal – both to the future of the EU’s world-leading system for managing corporate carbon emissions, and for how this market develops around the world. It’s therefore an absolutely vital part of the battle for net zero global emissions.
Let’s first understand what has prompted the tax. Within the EU, carbon emissions are governed by a cap-and-trade system. A cap is set on the total amount of carbon emissions that can be emitted, and power providers and other firms each get an allowance for how much they can emit themselves.
If their pollution exceeds their permit allowance, they must buy more permits on an open market. Crucially, if they pollute less than their permit allowance, they can sell their unused permits to other firms. The upshot is that firms earn more if they pollute less – a win-win.
What about the ETS?
Economists love the European Trading System (ETS) for this reason. Increasingly the market does too. With speculators betting that the days of unrestricted carbon emissions are coming to end, ETS permit prices have doubled since the start of the pandemic.
To level the playing field, EU industries are in the unusual position of lobbying Brussels to impose a new tax. In this case, on the carbon emissions of goods being imported into the bloc. Yet in the teeth of this high-stakes negotiation, several possible outcomes could actually make the situation with carbon emissions much worse than it is already.
Elsewhere at The Mint, Kathleen McAfee delves into the complexities of the net zero consensus, and Paul Frijters gets optimistic about the growing possibilities for tackling climate change.