Yesterday, the European Union released a sweeping 30-year plan to achieve net zero and reshape the economy. This has broad implications for every EU sector. The plan also has implications for the world including the United States infrastructure plans.
The EU plan includes carbon pricing as the key component to placing a cost on emissions. The Emissions Trading Scheme or ETS is a revamp of the previously ineffective 2005 carbon market. The pay forces large emitters, like power generators and steel makers, to buy credits to cover the cost of their carbon production. The new plan broadens the scope of those companies required to buy the credits, the mere hint of this has driven the price on the current EU carbon market above $75 or GBP55. Shipping, airlines (no free credits) and buildings will be swept up under the new plan.
The most controversial part of the new EU plan is the inclusion of a border tax on carbon. The Carbon Border Adjustment tax will impose a levy on imports based on their carbon footprint. The goal is to eliminate the ability of domestic firms to get around the ETS by basing their production in a country outside the EU to address what is referred to as carbon leakage. The tax will initially hit fertilizers, steel, cement and aluminum producers. This tax will apply to those nations who don’t have a similar scheme. Russia, Turkey and China will need to purchase credits on the system and have decried the potential negative impact to industries.
And this is where the United States will be impacted if they don’t create a similar program. However, this also is where the US infrastructure plans expand to include such a scheme. Under the new $3.5T infrastructure plan unveiled this week, there are climate change provisions to match the EU plan.
According to CNN, Democrats want to meet Biden’s climate change goals of “80% clean electricity and 50% economy-wide carbon emissions by 2030,” according to a senior Democratic aide. “The measure would fund a clean energy standard, vehicle tax incentives and electrification of buildings — among other matters. The measure also would propose “methane reduction and polluter import fees” to reduce emissions, the aide said.”
This has made Sen. Joe Manchin (D-WV) “very, very disturbed” about the direction the new plan was taking. As a reminder, Democrats need all of their 50 members to agree, or they won’t be able to pass the deal via budget reconciliation.
What’s fascinating is the new EU proposal and potential new US infrastructure plan will both impact the price of energy production and carbon centric goods. In turn, this will increase inflation. And negatively impact low to middle income workers more than upper income workers. This is the dilemma for the Biden administration and green progressives.
Policy to reduce carbon emissions raises the cost of carbon and raises the obstacles to getting it done.