Europe’s Green Deal is 21st century protectionism

Published in the Australian Financial Review, December 19, 2019

For the past week the headlines have been dominated by bushfires and Brexit, blackouts and Boris. Another heatwave, another disappointing UN climate talks.

It’s easy to have missed the red warning light that started blinking last week in the control room at the Department of Foreign Affairs and Trade (DFAT). The Europeans are on the move, taking the first shy steps towards using carbon emissions as a justification for trade protectionism.

European politics is like an episode of Grand Designs, but with the cast of the Sopranos: lofty ambitions backed by charming menace.

Last week new European Commission President Ursula von Leyden launched the European Green Deal. Modestly described as “Europe’s man-on-the-Moon moment, it branding is to put climate and environment at the centre of what she hopes will be a new unifying force in EU politics.

The mechanics are unsurprising: full European carbon neutrality by 2050, requiring a ratcheting of the current 40 per cent emissions reduction target by 2030.

This is estimated to require around $420 billion (EUR260 billion) of new investment every year for the next three decades. The focus of the European Investment Bank will be pivoted to help deliver this transformation.

One of the key policy tools to support this will be the resuscitated European emissions trading scheme. Announced in 2000 and first implemented in 2005, the carbon price was effectively switched to simmer after the global financial crisis.

A dormant carbon price has been as unsettling for investment in Europe as the climate policy parlour games have been in Australia. Last year the European Commission finally managed to tighten the market, sending the price of carbon in Europe to more $40 a tonne.

The problem is Europeans are paying for greenhouse emissions, but most of their trading partners aren’t. The Green Deal wants to protect European goods that have paid for their carbon, by introducing a carbon-border tax on imports that haven’t.

The scope of such a border tax has typically not been specified, but is expected to start with a few key sectors like steel and cement, and expand over time. It’s also likely to divide European industry: support from trade-exposed steel mills and smelters and opposition from manufacturers who will have to pay more for some imports.

European politics is shaped by complex horse trading between member nations. Where the idea of a carbon border tax end up is anyone’s guess. But it’s on the table.

It will wash well with the Greens who are both increasingly influential in Europe and dubious of the benefits of free trade and market economics.

European sensibilities around protectionism will be further diminished by the imminent Brexit. In the early 90s a young Boris Johnson was reporting from Brussels for London’s Daily Telegraph newspaper about the absurdities of European bureaucracy and regulation. In reality the UK was quietly but effectively shifting Europe towards a much less insular, more global outlook.

The UK saw Europe as a common market rather than a political union. It actively promoted the expansion of the EU into Scandinavia and then the eastern bloc countries, increasing its value as a trading block while weakening political unity and the ability subsidise and protect its markets.

The linguistic propensities of these new members had the added effect of quietly shifting the EU lingua franca from French to English.

The idea of a carbon border tax has already been touted by most of the Democrat front runners in the US Presential race as a more principled antidote to the perceived threat of Chinese imports, even though the US doesn’t have a carbon price to justify its implementation.

This trans-Atlantic appeal suggests protectionism is hitting a sweet political spot across a growing spectrum of voters who cannot recall the benefits of hard fought trade negotiations in the late 20th century.

The debasing of trade wars into political theatre has already been actively exploited by the White House. In an administration where every week feels like a new episode of The Apprentice, conflict is eagerly sought.

Countries and their leaders are being repeatedly fired only for a disagreement to be resolved in some unspecified new deal which is always great for America.

It may be vaguely amusing but the rise of protectionism and the growing global antipathy towards free trade should be concerning for a small, open, emissions-intense economy like Australia.

When the UK turned to Europe in the 1970s, Australia was forced to find new markets for its exports and turned to its fast growing Asian neighbours. The risk and impact of a trans-Atlantic carbon trade war remains distant for now.

It’s a risk best managed by getting out of the firing line and reducing our emissions intensity. That is if the bushfires and the blackouts aren’t enough motivation already.