How carbon border taxes can help a Biden presidency and the US economy

Amid America’s ballot tumult, the end of a French gas deal may have gone unnoticed. Yet, through an arcane regulatory concept, this decision could be the pivot that ties together three of the most consequential policy debates of the election: the “Green New Deal”, trade barriers, and being tough on China.

Last Tuesday, under environmental and government pressure, leading French utility Engie dropped plans to buy liquefied natural gas (LNG) from NextDecade’s planned Rio Grande plant in Texas. Campaigners have opposed the deal because of their objections to shale gas development, which would feed the facility.

Engie’s decision was not taken in isolation. Cynics might observe that it is owned 23.6 percent by the French government, and that France’s influential oil supermajor, Total, would welcome less competition to its LNG from the Middle East, Africa, Australia and Russia. But Total also has deals for American LNG supply, as well as a stake in Tellurian, the company developing the proposed Driftwood project in Louisiana.

Instead, Engie’s move must be seen in the context of European and global policy. The EU, UK, Japan and South Korea have pledged to be carbon-neutral by 2050; China by 2060. Together these countries account for almost three-quarters of global LNG purchases and three-fifths of global carbon dioxide emissions. In Europe in particular, there is increasing concern to limit the carbon footprint of its imports of all energy-intensive materials.

A likely way to achieve this is the carbon border tax, an idea publicised by the then French president Jacques Chirac in 2007. It would be levied on the implicit carbon emissions of imports from countries that do not have carbon pricing regulations compatible with the EU’s. This avoids disadvantaging European businesses as the EU’s carbon prices rise and encourages trading partners to introduce carbon limits of their own.

A key part of the current European Commission’s plans, the tariff could come into force as soon as 2022. It would arguably be permitted under World Trade Organisation rules allowing environmental protections, and would apply to sectors with high greenhouse gas footprints and relatively simple supply chains, particularly oil and gas, minerals, steel, aluminium, cement, plastics and chemicals.

Amongst a swathe of new opportunities from East Africa, the Middle East and Russia, American LNG appears particularly vulnerable to such environmental regulations. The heavy flaring of unwanted gas from oil production across Texas leads to high climate-warming emissions, even though LNG exports are intended precisely to make use of otherwise wasted gas.

Donald Trump’s rolling-back of regulations to reduce leaks of methane, the main constituent of natural gas and a powerful greenhouse gas, has done the US industry no favours. More seriously, his withdrawal from the Paris Agreement on climate change, which became effective the day after the election, makes his country the only non-member in the world – a legally and morally vulnerable position. Engie’s action is just the harbinger: the continued pursuit of American “energy dominance” through high-carbon exports is a dead end.

Mr Biden’s win comes, at least so far, without control of the Senate, with the Republicans likely to obstruct any elements of a positive programme as they did when he was vice-president to Barack Obama. Yet he must deliver on an ambitious agenda of environment, employment, equitable economic revival, and containment of China.

The Democratic platform indeed states that “the Biden Administration will impose carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations.”

The attractions of a carbon border tariff for the US, as for the EU, are clear. It would bring in government revenues less visibly than raising income or corporate taxes, as Donald Trump’s tariffs did. But unlike those levies, it would have an environmental rationale and, with skilful diplomacy, would thus be in alignment with the US’s traditional allies. China’s coal-heavy economy would be disadvantaged.

And it would support domestic manufacturing, including in the Rust Belt states key to Mr Biden’s victory, as well as in the energy industries of the future such as advanced batteries, electric vehicles, and renewable power systems. Mr Biden has promised to create ten million “green jobs” that pay “good union wages”, but often appeared woolly on specifics during the campaign.

Some states, notably California, put a price on carbon emissions, but getting a national carbon tax through Congress appears almost impossible. In its absence, a patchwork of regulations and a renewed commitment to the Paris Agreement will have to do – otherwise, American companies will be shut out of major markets, as NextDecade has found.

As such zero-carbon targets are enshrined, US businesses will comply and will have an interest in ensuring these barriers to competition from China, India or elsewhere stay up. Such pro-environmental protectionism is problematic for free trade but hard for a future anti-environmentalist Republican to discard.

If the US joins Europe in establishing carbon border taxes, other major economies would be likely to follow suit, to avoid disadvantaging their own industries and ensure they are the ones collecting the carbon taxes. That applies to China, to key US trade partners Canada and Mexico, and also to the Middle East oil exporters. If most major economies eventually adopt comparable policies, this will negate the benefits for domestic industries, but would for the first time realise the dreams of the Kyoto Protocol and Paris Agreement to progress coordinated global action on climate change.

The actual political, regulatory and legal path to border carbon tariffs is far more complex, of course. But they could align several hitherto warring constituencies in both Europe and the United States. They may be just the tool for Mr Biden to catch up four lost years on climate, trade and China.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis