Carbon tariffs, new trade wars, and family businesses

Renowned SPAC promoter Chamath Palihapitiya was among the first to back Tesla, bitcoin and space travel. Now he is leading the cry that proposals to deal with climate change could produce a global trade war. 

On April 8, he tweeted: “Imagine a new trade war between the US and China. Or imagine an increasingly aggressive European Union fighting climate change.  The simplest solution to enact both would be a carbon tariff.”

Love that iPhone case? “Its price will depend on how much coal was burned in China to make it. More coal: more tariff; more cost – Chamath Palihapitiya

“Companies aren’t prepared for this. Capital markets have no sense of it.”  

Palihapitiya supports carbon tariffs, but he concedes that Social Capital, his private investment group, will need to update its models.  Family businesses, be warned. 

He has picked up on a European Union decision to levy a carbon tariff on goods imported from countries that have less rigorous controls on carbon emissions.  

The EU calls the measure a “border adjustment mechanism”. It will be formally proposed by the summer, according to legal firm Norton Rose Fulbright, with a strong focus on steel, cement and chemicals. 

The UK has expressed interest in carbon tariffs as leader of the next G7 in June, as well as an upcoming climate summit in Glasgow to be hosted by the United Nations in November.

The stance of the US on climate tariffs isn’t entirely clear. President Biden is interested in the idea but the US has not made its position clear.

Canada is proposing introducing carbon taxes and recycling money to the needy. It is also open to carbon tariffs. 

Many in Europe see carbon tariffs as a way to protect local industry while, less plausibly, using their receipts to help the developing world, which would be hit by them.

The UK has expressed concern that its industries could move to countries with a less rigorous approach to emissions unless carbon tariffs are introduced.

As part of its climate package, the EU has an emissions trading mechanism, which puts a price on which gets charged to companies if their emissions go beyond agreed limits.  Proposals to force carbon disclosure on the capital markets are pending, says US climate envoy John Kerry.  

Over the year to early April, the EU price of carbon has risen by nearly a half to nearly 44 euros per tonne, potentially increasing the burden of carbon tariffs.

Such a system could also lead to challenging audit procedures for importers and exporters seeking to show how much carbon is used in manufacturing. 

“Love that iPhone case?” asks Palihapitiya. “Its price will depend on how much coal was burned in China to make it. More coal: more tariff; more cost.”

The majority of businesses are coming to terms with climate issues. In a survey of 450 companies, Dutch bank ING found that 62% of respondents will probably link executive pay to environmental targets.

As Palihapitiya points out, however, carbon tariffs could come as a shock to everyone, particularly exporters in the developing world. Australia, a significant exporter of steel, has vowed to fight the proposal.