Ques No: 1-7
Read the passage given below and then answer the questions given below the passage. Some words may be highlighted for your attention. Pay careful attention.
Since 2011, the world’s steelmakers have been feeling the heat. Prices for the metal have halved due to flatlining demand and rising exports from China, which now smelts 50% of the global output. Profits at steel firms around the world have fallen into a sea of red ink, shuttering plants and laying off workers. New measures designed to raise the price of carbon in the EU to help the bloc meet its climate-change targets, voted on by the European Parliament on February 15th, threaten to increase the pressure. The industry is a heavy user of carbon; responsible for 5% of global emissions. Some steel firms have responded by calling for carbon tariffs to prevent the measures undermining their international competitiveness. How do border taxes on carbon emissions work? And are they a good idea?
The reforms the European Parliament passed this week are an attempt to increase the price of carbon by cutting the emissions allowances granted to firms. The measures include the EU’s first border tax on carbon, levied on cement imports. Steel firms, also heavy users of carbon, say their exclusion from this scheme is unfair. This week Lakshmi Mittal, the CEO of Arcelor Mittal, the world’s biggest steelmaker, offered his support for the tax. Similar proposals in America are also being mooted. This month a group of Republicans—including two former treasury secretaries, James Baker and George Shultz—proposed a similar levy on imports at the border, as well as for domestic production. Their plan includes a carbon tax on imports of up to $40 for each tonne produced by their manufacture, which would increase over time. The income from the levy would then be distributed to American households on a quarterly basis to make up for higher consumer prices.
Proponents of such policies say that they remove the distortions caused by carbon taxes. Under the EU’s reforms, steelmakers in Europe would pay up to €30 ($32) to emit a tonne of carbon, but foreign producers selling in the EU would not have to pay a cent. This harms the cost competitiveness of European producers. It also encourages firms to move production outside the bloc rather than prompt them to use cleaner methods. Taxing imports on their embodied carbon—where this has not already happened in their country of origin—would level the playing field between different systems, they say. It would also give an incentive to countries without controls on emissions to introduce their own carbon taxes, in order to grab a share of the revenues.
Economists say the idea works in theory. But many think it would be much more difficult in practice. One big problem is the difficulty of calculating the embodied carbon in imports. This is not easy even for simple sheets of steel; for items made of several bits of metal from different sources, it is hellishly complex. Disputes over this could produce reams of litigation at the WTO between various systems. But the reason why trade economists are so squeamish about carbon tariffs is the fear that they could cause a tariff war. The EU and America are already in a politically driven tit-for-tat over steel duties with China; they have risen in some cases to over 500%. Rather than prod countries to tighten their own regulations, new carbon tariffs could make that battle more vicious. Worse still, lobby groups could easily pervert the charges into a form of quiet protectionism. Donald Trump’s presidency has already rattled free-traders’ nerves. Why risk giving the protectionists another opening?