Whether it’s French farmers spraying manure at government buildings or Dutch tractor convoys blocking roads, discontent is spreading across Europe as a result of climate policy. As a result, right-wing populist parties are rising in the polls while the greens can expect to be punished at the upcoming European Parliament elections.
This is hardly surprising. Just when Europe was plagued by high inflation and energy crisis caused by Vladimir Putin’s invasion of Ukraine, the European institutions decided to extend their ‘Emission Trading System system’, which essentially amounts to a climate tax, to more sectors – including maritime shipping, buildings and road transport. This was done despite warnings from poverty groups that it could have ‘devastating social consequences for low-income households’ because they ‘rely heavily on fossil fuels for heating and transport’. To cope, the EU is coming up with a new ‘Social Climate Fund’, which of course will again be paid for by the same taxpayers already affected by the EU’s climate policies.
Realising it was saddling its own industry with a major disadvantage, the EU also introduced an external carbon tariff or Carbon Border Adjustment Mechanism (CBAM) to prevent companies being undercut by foreign competitors. The fact that these costs will simply be passed on to European consumers apparently escapes the policymakers, but Europe’s trading partners are obviously also far from happy about this.
Indian Commerce Minister Piyush Goyal warned in December that India will take ‘retaliatory measures’ against what he considers to be unfair customs tariffs, as these would hit Indian metal exports to the tune of $8bn a year. Along with South Africa, Taiwan and several developing countries, India is currently looking at challenging CBAM at the World Trade Organisation (WTO). India is now working on its own carbon tax mechanism that seeks to tax imports from developed countries for what India sees as their historic carbon emissions. This reveals how the EU’s tax and regulate climate policy model ultimately risks ending in trade wars and protectionism, with climate as an excuse.
The poorest countries are particularly hard hit by CBAM. According to a study by the African Climate Foundation and the London School of Economics, the EU’s protectionist CBAM climate tariff would cost Africa $25bn, which is almost four times what the EU donated in development aid to Africa in 2021. African countries complained at WTO level that this ‘unilateral environmental measure’ risks reducing African GDP by more than 1% while doing little for the climate.
Alternatives
It should therefore be clear that a different approach is needed. The ‘Climate & Freedom International Coalition‘ – a group of academics and policymakers – worked out an alternative to current central planning policies and the collectivist Paris Agreement. In doing so, the group proposed an international treaty relying on free markets to come up with carbon-neutral solutions.
In a nutshell, this alternative model boils down to the idea of simply ending large-scale government intervention in the energy sector by abolishing all conventional energy subsidies. The idea is to encourage investment in newer, cleaner technologies.
States that ratify this treaty would then enjoy trade benefits, provided they adopt climate-friendly free market policies. Suggestions for this include encouraging targeted tax cuts (‘Clean Tax Cuts’), specifically in the four sectors that account for 80% of greenhouse gas emissions – transport, energy and electricity, industry and real estate – and tax cuts aimed at demonopolisation. The latter means scrapping profit taxes for investors that purchase companies with a monopoly and state-owned enterprises, all with the aim of encouraging energy market liberalisation among treaty parties.
Entrepreneurs and financiers in the states that signed the treaty will be offered tax-exempt ‘CoVictory bonds’ to make investments in ‘Property, plant, and equipment (PP&E)’ – assets that are important to companies in the long term. The aim is to thereby lower the cost of borrowing by at least 30%, to incentivise more innovation.
Tensions with trading partners
Climate initiatives are only one aspect of EU environmental policy that is increasing tensions with trading partners. Rebeca Grynspan, secretary-general of the United Nations Conference on Trade and Development, now agress that Western environmental policies are harming the development of emerging economies. Regarding the US Inflation Reduction Act, which provides vast subsidies to the production of US electric cars, and similar European measures to promote green technology, she rightly states, ‘Developing countries see many of these policies as protectionist’, while ‘trade and investment… are important for dynamic, sustainable growth’ in those same nations.
She also criticises the new EU deforestation directive, which she considers too restrictive: ‘If you only punish the population and don’t help them have a sustainable income from a sustainable forest… what is the way forward?’
A trade dispute over exactly this arose last year between the EU and Malaysia and Indonesia, both major exporters of palm oil, which faced new bureaucratic requirements as a result of the new EU rules. The ITC, a joint agency of the UN and the World Trade Organisation, warned that because of these EU policies, there could be a ‘disastrous’ effect on global trade, as smaller producers in particular risk being ‘cut off’ from market access.
The crux of the problem is that the EU flatly refuses to trust the standards of trading partners. In the case of Malaysia, for example, this is the Malaysian Sustainable Palm Oil (MSPO) certification programme. Recently, the country was praised by the NGO Global Forest Watch for reducing deforestation. Unlike the EU, the UK government recognises the standards of its Southeast Asian trading partners in this area, which was also an important reason for the UK to be granted access to the Trans-Pacific Trade Agreement CPTPP, the largest trade deal for the British since Brexit.
Undermining free trade
In other policy areas, too, the EU is increasingly trying to impose specific policy choices and conditions on trading partners, leading to tensions, as for instance with its new ‘due diligence’ directive. This requires importing companies to investigate not only whether their suppliers violate human rights, but also whether they respect all kinds of specific social and ecological standards. A German industry federation fiercely criticised this, warning that ‘with this, the EU is putting the next nail in the coffin for the international competitiveness of European industry.’
One of the reasons why the EU has so far failed to finalise the Mercosur trade agreement with Latin American economies is precisely because it keeps trying to use trade negotiations to impose all kinds of specific policy choices upon its trading partners. At least that is what experts like Marcela Cristini, senior economist at the Argentine Foundation for Economic Research in Latin America (FIEL) argues. According to her, the EU’s environmental requirements are ‘excessive’ compared to the economic benefits the agreement would have for Argentina.
Despite all its flaws, when it comes to opening up trade with the rest of the world, the European Union has been able to show some decent results in the last two decades. However, due to its obsessive green policies, this reputation is starting to unravel. Perhaps the upcoming European Parliament elections will change this.
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