Climate Policy Is Green Camouflage for the EU’s Protectionism

By Pieter Cleppe

Tuesday, April 25, 2023

 

Over the years, the European Union (EU) has been rolling out all kinds of measures meant to deal with climate change. This push has been accelerating lately, and it is becoming ever more evident how often it just amounts to raising more barriers to trade in a bid to keep foreign competition out of the EU.

 

The starting point for this is the EU’s de facto “climate tax.” Since 2005, the European Union’s “cap and trade” scheme has involved imposing a levy on CO2 emissions with its Emissions Trading System (EU ETS), whereby entities could then trade away their right to emit CO2. The idea is that by enabling companies to buy and sell such a right, emissions are saved where it is most efficient to do so.

 

One small objection here is that — as the prominent Danish economist Bjørn Lomborg has pointed out — complying with stringent CO2-reduction targets laid out in the international Paris Climate Agreement would necessitate a financial cost of $1–2 trillion every year from 2030 onwards, but only reduce temperature increases by a mere 0.027 °C. Lomborg believes a better use of financial resources would be to help victims of natural disasters. He also believes that the EU and its member states would see more return on investment by no longer constraining nuclear power, an energy source that notably combines reliability — something which “renewable” energy sources like wind and solar power lack — with minimal CO2 emissions. The EU is divided on this approach, however, even if, in the case of nuclear power, all of its members are legally bound to promote this energy source as a result of the Euratom treaty.

 

Instead, European governments are now broadening the range of industries that will be charged for their CO2 emissions. The European Parliament just voted to extend the “cap and trade” scheme to the building and transport sectors, which were previously exempt. Importantly, this will apply to gasoline, diesel, and heating fuels such as natural gas, which means it will directly affect everyday households.

 

True to form, the new policy also includes measures to compensate consumers for this cost created by the EU itself. An 87 billion euro “Social Climate Fund (SCF)” will be set up, which the same EU consumers will need to finance as taxpayers.

 

It remains to be seen whether inflation and continuously elevated European energy prices will lead to opposition from voters. One French left-wing politician dubbed the newly agreed measure to extend the EU carbon market as another attack “on the most precarious . . . households.” However, in Western Europe the political power of the green movement is still very strong. In Belgium and Germany, for instance, governing greens are fighting to delay the extension of perfectly functioning nuclear-power plants, with varying degrees of success.

 

If all of that isn’t bad enough, the whole thing is now degrading into protectionism. With its new climate tariff on imports — dubbed the EU “Carbon Border Adjustment Mechanism” or CBAM — coming into effect in 2026, the EU aims to compensate European industry for the competitiveness it has lost thanks to the climate levy. Despite protests by the EU’s trading partners that this violates World Trade Organization (WTO) rules, the EU is simply going ahead with it.

 

Such policies stem from the same economic-policy illiteracy which lies at the root of Europe’s experimental energy policies. These involve phasing out domestic fossil-fuel production without establishing a reliable and cost-effective substitute. Together, the results are currently contributing to what has been described as an ongoing process of “deindustrialization” in Europe that is hurting importers and end-consumers.

 

And these are not the only policies doing damage. Indeed, there are plenty of examples of EU climate policies being used for protectionist purposes. The EU’s newly proposed Net Zero Industry Act, for instance, aims to ensure a 40 percent local share for key green technologies by 2030. The policy is in part a response to the Biden administration’s Inflation Reduction Act — which, with certain exceptions, reserves fiscal support for “green” investment to North American miners and manufacturers — but that doesn’t make it any less unreasonable.

 

 

According to Francisco Beirão, head of EU government affairs at a company that develops and manages solar projects, this proposal is “very protectionist” and is driven by fear of competition from the U.S. and China. Former Swedish prime minister Carl Bildt has also warned that the EU’s response risks ending up as “crude protectionism and dirigisme.” And even Bruegel, an EU policy think tank with close ties to the European Commission, has condemned the EU’s proposal as “unabashedly protectionist” given that “the aim is import substitution of specific manufacturing products, on a rather massive scale.”

Bloomberg columnist David Fickling has offered a particularly clear-sighted perspective, arguing that the EU’s green protectionism will actually “slow the pace of renewable transition, by forcing up costs for renewable developers and electric-vehicle buyers,” all “in an attempt to protect sub-scale European green-energy manufacturing industries.”

 

Taking a step back, it is clear that Europe is headed in the wrong direction. Indeed, Brussels’s outward support for ineffective climate-change policies reflects its inward protectionist mood. If things continue on this course, it won’t be good for Europeans or for the planet.