Economists of Germany's largest public bank warn against carbon border tax costs

Economists at Sparkasse, Germany’s largest public bank, have criticised a planned carbon border tax, saying that a study of potential effects on the European economy’s openness and fiscal productivity was “sobering”. The European Commission proposed the mechanism in December as part of its Green Deal, with the aim of preventing big emitters — such as heavy industries — from outsourcing production to less-regulated countries (known as carbon leakage). The mechanism could involve a carbon tax on imported goods based on CO2 emissions, while EU exporters would be compensated for EU carbon prices when sending goods outside the bloc. The European Commission is expected to make a full proposal in 2021.

The effect of the adjustment could be positive, as it would reduce the incentive for countries to attract industries through lax climate regulation, for example, according to the Sparkasse report. Its implementation, however, would be cumbersome, and it is unclear how it would conform with existing trade rules, it added. It is also unlikely that substantial tax income could be expected from the mechanism, the report found. “We see serious problems with fair and effective feasibility,” the authors wrote. “The fact that carbon accounting is laborious is just the beginning.” For instance, the report states that “entire business models” could develop to find ways of trading goods to optimally benefit from various border taxes. The feasibility of implementing the mechanism in a way that conformed with existing World Trade Organization rules was also unclear and at worst could even turn into a net loss for national budgets, they wrote.

Germany’s Sparkassen are part of the country’s public credit institutions and have one of the highest market shares, particularly in the private savings deposit business and in small and medium sized company financing. As part of the public sector, they are explicitly not profit-oriented.

In June, German Chancellor Angela Merkel said there was “a common position” that the bloc needs such a mechanism. But German government officials and MPs have cautioned against a quick introduction. The plans have also been criticised as protectionist, especially by the US.