Carbon border tax plan could worsen US-EU trade tensions

The burgeoning trade war between the United States and the European Union appeared set to deepen on Thursday after the nominee for the role of EU tax commissioner said work could start quickly on a new tax targeting foreign firms that pollute.

In his confirmation hearing on Thursday, Italy‘s Paolo Gentiloni – the EU‘s tax commissioner-designate due to take office in November – told lawmakers he will “be very quick and effective on a carbon border tax”. 

The tax would shield European companies from competitors based in countries where climate protection schemes are not as strict and would be a blow to US companies. 

US President Donald Trump intends to withdraw the US from the international Paris climate protection deal that aims to reduce carbon emissions. Under the terms of that pact, the proposed withdrawal cannot happen before November 4, 2020.

Gentiloni’s remarks come the day after the US said it would slap 10 percent tariffs on European-made Airbus planes and 25 percent duties on French wine, Scotch and Irish whiskeys, and cheese from across the continent, as punishment for illegal EU aircraft subsidies.

Previous European Commissions have resisted calls – led by steelmakers and traditionally protectionist France – for a carbon levy. But fresh momentum has come from increased prices in the EU’s Emissions Trading System (ETS), the flagship instrument Brussels has for making polluters pay.

In separate comments to lawmakers, Gentiloni, a socialist and Italy’s former prime minister, also said minimum corporate tax rates were one of the possible solutions to what he said was unacceptably excessive tax competition between EU member states.

Currently, the 28 EU countries are free to decide on their national tax rates for firms, with the EU having limited powers only on minimum rates for sales taxes.

Gentiloni reiterated that the bloc should move alone on an EU-wide tax on digital corporations if no deal is reached at a global level in 2020. He said he was confident – although “not fully optimistic” – about an international agreement by that deadline.

In the event of no consensus, Gentiloni said the European Commission, which is the executive branch of the EU, would begin working on a proposal for a digital tax from next summer onwards, and would seek to take away from national governments the veto power on tax matters that prevented the introduction of a digital levy in the bloc last year.

Fiscal effort

Gentiloni, who will also be in charge of the bloc’s economic policy, said the EU should consider measures to favour growth at a time when the bloc faces risks of a prolonged economic slowdown.

“In this situation, our economic policies should be strongly oriented towards growth and investment,” he told lawmakers.

Gentiloni said the commission’s annual recommendation on the eurozone’s fiscal stance would depend on the “seriousness and duration of the slowdown”, as estimated in the next set of EU forecasts due on November 7.

He cautioned a slowdown could last longer than six months or a year, as currently expected.

In its latest economic forecasts released in July, the commission predicted eurozone growth would slow to 1.2 percent this year from 1.9 percent in 2018, but forecast growth rebounding to 1.4 percent in 2020.

The bloc currently has a “broadly neutral” fiscal stance, despite pressure from some countries for more expansionary plans to counter recession risks. The European Central Bank (ECB) also backs a less restrained fiscal stance.

The ECB loosened monetary policy further last month to lift growth and inflation, cutting its key rate to minus 0.5 percent and inching closer to what is the effective bottom – a level beyond which it would be counterproductive to go.

Gentiloni reiterated that he would seek to use the leeway allowed by EU fiscal rules to permit governments to invest for growth. He said he would also target a reduction of public debt.

He called for a review of EU fiscal rules that would make them simpler and urged an “ambitious” funding plan for an EU unemployment reinsurance scheme.

The bloc is currently debating whether to fund this scheme with loans or with more generous grants to states with high levels of unemployment.