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U.S. Warns EU Not to Make Carbon Border Tax a DST

Posted on Jan. 28, 2020

The United States may impose new tariffs on the EU if its carbon border tax is imposed as a digital services tax, U.S. Secretary of Commerce Wilbur Ross warned.

“Depending on what form the carbon tax takes, we will react to it — but if it is in its essence protectionist, like the digital taxes, we will react,” Ross was quoted as saying in a January 26 Financial Times article.

In December the European Council announced the European Green Deal,which proposes, among other things, the implementation of a carbon border adjustment mechanism to ensure that the price of imports more accurately reflects their carbon content. The new measure would be designed to comply with WTO rules and the EU's other international obligations, and would be "an alternative to measures that address the risk of carbon leakage in the EU’s emissions trading system" (ETS).

The ETS, which has been in effect since 2005, works on the cap-and-trade principle: A cap is placed on the amount of greenhouse gas emissions each company is permitted, and within that limit, companies buy and trade emission allowances. The allowances must cover all of a company’s emissions for the year, or heavy fines will be imposed. 

During a January 22 speech at the World Economic Forum in Davos, Switzerland, Commission President Ursula von der Leyen spoke about the carbon border tax, warning that countries that do not take action to support the commission’s goal of being climate-neutral by 2050 may face the tax.

During a separate panel at the forum, U.S. Treasury Secretary Steven Mnuchin echoed Ross's lack of support for a carbon tax. Mnuchin disagreed with European Central Bank President Christine Lagarde's position that companies can and should forecast the cost of protecting the environment as far as 30 years in the future. “I don’t think we know how to price these things, so I think we are overestimating the cost," Mnuchin said, adding that he thinks costs will be much lower in 10 years. Furthermore, he said, the use of a carbon tax as a punishment would hurt hardworking people.

It was a busy week for Mnuchin, who met with French Finance Minister Bruno Le Maire on the sidelines of the forum after France threatened to escalate trade tensions with the backing of the EU. After the meeting, Le Maire announced that France would delay collecting its DST and that the United States agreed not to impose tariffs on French imports until the end of 2020, allowing more time for countries to work toward a consensus on a global tax framework at the OECD level.

The Office of the U.S. Trade Representative had earlier proposed retaliatory tariffs of up to 100 percent on some $2.4 billion worth of French imports, saying France’s 3 percent DST discriminates against U.S. companies. The USTR said it also would consider opening investigations into Italy, Austria, and Turkey, all of which are pursuing their own digital taxes. 

Other countries have since followed suit, appearing to ignore the threat of tariffs. The Czech Republic is awaiting parliamentary approval of its DST, and U.K. Chancellor of the Exchequer Sajid Javid has said his government will proceed with its 2 percent DST, set to take effect April 1. Mnuchin said the United States could respond with auto tariffs.

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