The Climate Trade War Escalates

The immediate threat is the 15% minimum corporate tax European leaders unanimously endorsed Monday after last hold-out Hungary buckled to peer pressure. This is the European version of the global minimum tax negotiated under the auspices of the Organization for Economic Cooperation and Development. A large company whose global effective tax rate isn’t at least 15% of profits would be required to pay top-up taxes to European governments. This is supposed to stop a “race to the bottom,” which is European-speak for healthy tax-policy competition.

Nearly 200 governments, including the U.S., signed up for this deal at the OECD. So far the EU’s 27 countries are among the few who have been foolish enough to implement it. China, India and many other developing countries probably never will, and same for the U.S.

The rules remain half-baked even as EU countries will rush to pass this package into national law by the end of 2023. Crucial questions linger, such as how to treat tax credits. European leaders assume they can resolve these problems via regulations once the laws are passed, but companies need to know how the rules will affect investment decisions.

Washington imposes its own minimum tax on U.S. companies’ global profits (the global intangible low-tax income tax, or Gilti), but the U.S. and OECD versions are calculated in different ways. American multinationals could be double-taxed on portions of their global income, since the EU rules may not count Gilti payments as part of the effective tax burden. The plan also gives the EU an opportunity to tax U.S.-based income that Congress exempts from American taxation, if the result of U.S. tax breaks is a low global effective tax rate. This mess has tax border war written all over it.

Europe is also pushing ahead with a carbon border adjustment mechanism, or CBAM, to tax imports on their carbon intensity. Europeans say this border tax is necessary to “level the playing field” for manufacturers that must pay for carbon emissions credits under the Emissions Trading System (ETS).

The ETS already makes it less economical for some industries to operate in Europe, leading green activists to note a rise in imports from countries that don’t impose the complex tax. Imagine that. The CBAM would apply to imports from countries that don’t tax carbon emissions. Brussels plans to phase in the CBAM as more European industries lose their exemptions from the ETS.

This is another investment killer, especially since manufacturers losing ETS exemptions also face sky-high energy prices. European companies still would have incentives to move production offshore to avoid ETS costs, but CBAM will create friction with Washington if American firms are forced to pay the carbon tariff. The biggest losers will be beleaguered European consumers.

Treasury Secretary

Janet Yellen

promised the world that the U.S. would pass the OECD minimum tax, though there’s no evidence Congress would do so even under Democratic control. President Biden has also sacrificed America’s leverage against global carbon taxation by embracing the trade-war-sparking green subsidies in the Inflation Reduction Act.

Europe’s new taxes are another blow to the wavering world economy, and carbon tariffs show how climate policy has become an anti-growth project. A better U.S. Administration would fight this, but the Biden White House and Treasury are fellow travelers.