Scroll down to the comments section of any piece written about climate change nowadays, and you’re almost guaranteed to find a variation on the following: ‘Britain’s green policies are futile, because firms simply react by moving elsewhere. This achieves nothing for the environment, and nothing but damage for the British economy.’
While it’s a superficially compelling argument, there’s little robust evidence that the phenomenon – often termed ‘carbon leakage’ – has been occurring to any great extent in the UK. Firms which do decamp are probably more likely to leave due to supply chain snags, tax and regulatory issues, or differences in labour costs.
But that’s not to say that the threat of carbon leakage won’t rear its ugly head in the near future. As Britain ramps up its ambition on addressing climate change, it’s more likely that the pressures it puts on polluters could well lead them to seriously think about packing their bags.
It is in this context that the former International Trade Secretary, Liam Fox, recently made the case for a carbon border tariff. Speaking at the Centre for Policy Studies, Dr Fox explained how such a policy would create a level playing field between domestically and foreign made goods in terms of the impact their production has on the climate. Set properly, a carbon border tariff would ensure that British industry isn’t unfairly undercut by overseas competitors who don’t face the costs of climate regulations in their own countries.
Exactly how a carbon border tariff would be administered is still up for debate. But a rough sketch of how one might work in the UK would probably see it tied to the carbon price which is already levied on energy intensive industries here through the UK Emissions Trading Scheme. If imports are coming into Britain having paid no carbon price in their origin country, they would be expected to pay the costs they would’ve had to pay if they’d been made in Britain. (For readers wanting a more detailed discussion, Sam Lowe gives an excellent overview.)
For believers of market economics, tariffs are seldom the first things we wake up in the morning wanting to eulogise about. But climate change is fundamentally a collective action problem, which can create legitimate grounds for government intervention. The question thus becomes not about whether to act, but how to act.
In the absence of a carbon border tariff, the alternative way to counter carbon leakage could well be for the government to dole out all sorts of subsidies and favours to domestic firms to keep them happy. Or, it might throw up truly draconian trade impediments which keep out any sort of products which aren’t deemed to be up to British standards – somewhat analogous to the current battles being waged over Australian beef imports to the UK. I’m not convinced that either of these are better than carbon border tariffs, which simply seek to price out emissions in a much more targeted way.
Moreover, the overwhelming direction of political travel points towards the inevitability of carbon border tariffs. The EU will almost certainly implement one – with draft plans due to be laid by the Commission in the coming weeks. President Biden has also flirted with their introduction. Today, the Times reports that the Environment Secretary, George Eustice, has said carbon border tariffs are being looked at.
It strikes me as logical, therefore, for the UK to be at the forefront of the conversation – actively sculpting the principles which underpin carbon border tariffs, so not to be bounced into a scheme later down the line, which it has had no say in designing.
It’s worth noting that carbon border tariffs don’t come without any downsides whatsoever. Having no real precedence, it probably makes sense to phase them in gradually to begin with. The government should also work closely with impacted businesses to monitor the effects the tariff is having, and to see whether any improvements can be made to its application. To avoid throwing up trade barriers to the least economically developed nations, they should be given a waiver – in the same way that many already benefit from unilateral quota- and tariff-free access to the UK.
We have heard for years of the desire to make ‘Global Britain’ a reality. As the country with the current presidency of the G7 and COP26, now is the time for the UK to take the lead on bold, international policies. Spearheading efforts to introduce a carbon border tariff can do exactly that – ensuring free trade remains fair trade, and making a meaningful difference in the fight against global warming.