Could Carbon Taxes Lose Us a Cold War with China?

– December 24, 2021 Reading Time: 4 minutes

With global carbon pricing a possibility after Article 6 of the Paris Agreement was finally ratified at COP26, multiple governments are now looking to cooperate on imposing a carbon tax on high-emission fossil fuel producers. This collaborative international action is not unprecedented. The G20 Summit preceding world leaders’ trip to Glasgow produced a 15 percent corporate tax imposition agreement, garnering 136 signatories. The impediment to policy makers is not one posed by bean-counting an appropriate tax rate, but by precarious international relations. As an energy security Cold War brews, any carbon tax commitments must endeavor not to undercut the economic improvement of developing nations, which could drive them toward China for financial aid.

China’s Belt & Road Initiative (BRI) is a superficially enticing prospect for countries playing catch-up to the UK, the Americas, and Europe in infrastructure, transport, and energy. Marketed as a “Marshall Plan” for Asia and Africa, BRI launched in 2013 originally to connect China’s coastal cities to its rural interior, before becoming a “Digital Silk Road” for telecommunications, artificial intelligence, and cloud computing. It has funded high-speed rail, new nuclear power stations, wind and solar energy, and high-voltage transmission grids. This rapid upgrading of infrastructure, and incorporation of areas into China’s surveillance and data collection network became a model for imperial expansion beyond China’s borders. With 139 countries involved, the Communist Party’s goal to reorient global trade toward a reliance on China as the leading producer has been realised.

This move has destabilised the centralised banking networks of the West, undercutting their interest rates and avoiding regulatory red tape to deliver faster infrastructure upgrade funds to needy nations. But the price is repaid in political capital, with £300 billion in debt accumulated by these countries, and the localised economic opportunities for their populations rendered transitory by China’s importing its people as a slave workforce. China has preyed on the economic vulnerability of these countries, and eradicated their hopes at self-sufficiency in an international staring contest with the West.

China’s loan program is devouring indebted countries. For example, Beijing just annexed Uganda’s only airport, citing £207m in unpaid debt. Now, China is making financial incursions into Commonwealth nations, hitting the gas on imperialism with £685billion in investment while Britain is asleep at the wheel.

If Britain and its allies aren’t careful, carbon taxes could lose them this new Cold War over energy and resource supply lines against China and Russia. Levying tariffs on high-carbon cheap Chinese steel could see prices on our high-quality building materials escalate to costs beyond the budgets of low-GDP countries. This won’t negate the demand for materials from these nations, but will cause them to seek supplies elsewhere, like China. Likewise, many nations in Africa still rely on charcoal as a primary fuel source. Without the grid infrastructure in place to support renewables, and without their present issues concerning weather precariousness, grid inertia shortfalls, and generation troughs addressed, these countries cannot leapfrog to cleaner sources than coal when taking the next step in industrialising. With the West committing to tax coal out of existence by 2040, at the same time China has commissioned 252 coal plants to exceed production capacity, it’s clear who the cheaper and more reliable supplier of fossil fuels will be for these countries. Even after fossil fuels, the world still secures 80 percent of its battery storage capacity from China anyway.

When trying to penalise the harmful externality of pollution, policy-makers must operate with principles of revenue neutrality to avoid unduly penalising the poor during the transition to renewables, electric cars, and other technologies divested from oil and gas. A flat income tax, and elimination of subsidies for any energy generating method, fossil fuels and renewables alike, could ameliorate the dangers of increased household costs. This could be beneficial for tax-averse policy-makers too.

But domestic revenue neutrality does not avoid these infrastructure investment pitfalls overseas. An impact-reduction approach should also be taken beyond borders. Any carbon tax must be border-adjusted, taxing products from developed non-carbon-taxing nations (like China), to avoid unilateral adoption putting Britain at an economic disadvantage. But also, as AUKUS, CANZUK, and ACCTS demonstrate, a will exists among the Anglosphere and its Commonwealth allies to cooperate on fair trade, mutual defense, and environmental solutions. An international agreement on implementing supply-side tax cuts for sustainable infrastructure projects could incentivise investing overseas, circumventing the need for Chinese involvement. Collaborating to establish an agreement exempting investment in clean innovations from income tax on interest, an inverse version of the corporate tax pact, can strengthen international relations and involve more nations in the open market. Lower, not new taxes are the answer to curbing authoritarianism creeping into the region.

Narrowing promises of “levelling up” to Britain alone will set us at a disadvantage when battling the rising tide of planned economic authoritarianism worldwide. Extending a cross-border reciprocal tax-break olive branch to countries under the thumb of Chinese influence will affirm Francis Fukuyama’s famous proclamation that free-market liberalism is the final say on how humanity should self-govern. In this standoff between markets and the long march of socialism through continents, the UK and its allies must leverage supply-side economic incentives as a tool in the arsenal for architecting a cleaner, greener, and freer world.

Policy-makers must be aware of the international implications of their environmental solutions. Environmental wellness need not, and must not, come at the cost of economic prosperity. Non-punitive market mechanisms which foster cross-border cooperation are the only way to ensure a clean, green victory in the infrastructure and energy Cold War against China. To draw the developing world from the clutches of China’s Communist Party, policy-makers must incorporate revenue neutrality into their carbon tax considerations, or else abandon the plan entirely.