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Inflation Fuel

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Inflation Fuel

European policymakers implement a carbon-taxation scheme that will drive up prices. December 20, 2022
Infrastructure and energy

The European Union has decided to tax imports with a “carbon border adjustment mechanism.” Intended to accelerate global reductions in carbon-dioxide emissions, the policy will instead inflate the cost of everything Europeans buy.

Two basic facts about imports in Europe will drive the policy’s inflationary effects. First, Europe, like the U.S., is a huge importer of minerals and metals, which are heavy and energy-intensive. When counting imports in tons, not dollars, Europe brings in twice as much as it exports. That dependence is intentional and not about to change soon, since European regulators, like those in America, tend to be hostile to mining and heavy industry. As with the U.S., Europe accounts for less than 5 percent of global mining. But, everything that’s manufactured begins with materials that are mined somewhere.

Second, global mining accounts for nearly 40 percent of global industrial energy use. Mining uses 350 percent more energy than does global aviation. Some 90 percent of energy for mining comes from hydrocarbons. Oil alone fuels over 90 percent of the machines that transport minerals and the products made from them.

All this means that Europe’s new policy will raise the costs of mineral imports, and anything made elsewhere from those minerals. Consumers in Europe—and here, too, if Congress ever implements a similar policy—should expect to see price hikes in everything from jewelry and appliances to solar modules, conventional cars, and, ironically, electric vehicles.

For a hint at the overall cost implications, consider a recent report commissioned by France’s High Climate Council. In counting imports in terms of the carbon dioxide emitted to make them, the report found France’s actual carbon footprint was nearly double the domestic number usually reported. That’s a lot to tax. Since France imports many goods from its EU neighbors, a carbon-border-tax regime would create a labyrinthine credit system to avoid double-counting. But that wouldn’t change the unavoidable fact that carbon-intensive materials will be imported from somewhere—and taxed.

Consumers will soon learn about the reality of “embodied energy.” Huge machines and big industrial processes are used to access and refine all minerals and metals, from rare elements such as gold or neodymium (the latter used in wind turbines) to such common elements as iron (used for steel in appliances, cars, and buildings) and aluminum (used to build airplanes and electric cars). Ignored in all the carbon-taxing plans is the fact that energy use per pound of minerals is rising.

One might suspect that the policy is also designed to counter Chinese influence. While OPEC produces about 40 percent of global oil, China produces from 40 percent to 90 percent (depending on the mineral) of the world’s refined “energy minerals” that are essential for building batteries and solar and wind machines. China emits the most carbon dioxide because its export-centric energy-intensive industries use hydrocarbons and are powered by a mostly coal-fired grid.

But the idea that a border tax will force polluters to pay is risible. Input materials are largely irreplaceable; consumers will foot the bill. Policymakers ultimately want to discourage the use of carbon-intensive products, but that includes pretty much everything since hydrocarbons supply over 80 percent of global energy.

If forcing higher costs is intended to encourage the “transition” to hydrocarbon alternatives, then energy prices will stay inflated for a long time. Add to this a feedback loop that will further raise costs: to deliver the same amount of energy as conventional sources, building the preferred wind, solar, and battery hardware uses some 400 percent to 7,000 percent more minerals (per IEA data). Indeed, “green” mineral demands are expected to radically outstrip world supply.

Over the past few years, the prices of basic metals have already risen. Copper and aluminum, for example, are up 50 percent, while lithium is up over 600 percent. Electric cars use triple the amount of copper and aluminum as ordinary cars and can’t go without lithium. Most of the cost of building a battery is tied up in material inputs. No surprise that EV battery prices rose this year and are expected to rise in 2023—and that’s before any carbon taxes. If the oft-discussed goal of a $100 tax per ton of CO2 is achieved, every EV battery will face a tax bill of about $1,500.

As for the wishful thesis that taxes will spark innovation: foundational technologies don’t emerge from tariffs and bureaucratic impediments. For most critical processes in heavy industries, viable substitutes for hydrocarbons are decades away or simply don’t exist. A stroke of the pen can inflate costs, but it can’t change reality.

Photo: photoschmidt/iStock

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