The US commerce secretary has warned that the Trump administration would “react” to the EU’s plans for a carbon tax with possible punitive measures against Brussels, even as officials attempt to strike a truce in their trade feud.

Speaking to the Financial Times, Wilbur Ross compared the EU’s plans for a carbon tax to moves by several European countries to impose a digital services tax, which has angered US officials and caused Washington to threaten tariffs on EU products.

“Depending on what form the carbon tax takes, we will react to it - but if it is in its essence protectionist, like the digital taxes, we will react,” Mr Ross said.

The commerce secretary’s comments are among the clearest signs that the EU’s plans for a carbon tax - a top priority under the new commission led by president Ursula von der Leyen - could emerge as a major new irritant to transatlantic relations.

Ever since President Donald Trump announced America’s withdrawal from the Paris climate accord, the EU and US have been at odds over global policies to tackle climate change, but those tensions had not yet spilled over into the trade arena.

Mr Trump and Ms von der Leyen said last week in Davos that they would try to strike a limited truce in their trade war this year, easing fears of full-blown escalation. Officials have said there could be common ground in areas ranging from agricultural trade and standards, to technology and energy, that could be settled fairly rapidly.

But the potential for new flare-ups remains. US officials have repeatedly threatened to impose tariffs on the EU automotive sector, and the split on climate policies appears to be widening.

Carbon taxes

Ms von der Leyen outlined last week how her flagship green deal programme would need to involve some carbon border regulations or taxes to ensure that the benefits of the programme were not offset by carbon embedded in imports.

The bloc’s officials are understood to be particularly concerned that EU products could be undercut by imports from places with lax environmental standards, such as China, Russia and India, but would extend the scrutiny to other trading partners such as the US.

“There is no point in only reducing greenhouse gas emissions at home, if we increase the import of CO2 from abroad,” Ms von der Leyen said. “It is not only a climate issue; it is also an issue of fairness towards our businesses and our workers. We will protect them from unfair competition.”

Her rhetoric has been matched by a softer stance taken by officials who call it a “mechanism” not a border tax. They suggest it would probably be imposed very gradually in highly polluting sectors by encouraging exporters to the EU to participate in its emissions trading scheme, which puts a market price on carbon.

A similar logic has underpinned European nations’ actions to collect tax from tech giants, creating rage in the US administration which threatened France with tariffs on cheese and champagne and said the UK would be in line for “arbitrary” tariffs on cars if it followed the same route.

France, the UK, Italy, Spain and Austria have held firm, saying it was politically impossible to allow US tech giants to make significant profits from activities in their markets but pay little to no tax. That row was defused in Davos this week with the US stepping back from its threats to impose tariffs on France imminently, but if there is no international agreement in Paris, the tension could soon rise again.

Mr Ross’s warning on carbon taxes came as he defended the Trump administration’s environmental stance, which has been criticised around the world for ditching America’s global engagement on the issue while lowering regulatory standards domestically to remove disincentives to pollute. During the Davos meetings, Steven Mnuchin, the US Treasury secretary, sparred with Christine Lagarde, the European Central Bank president, over ways to tackle climate change. Mr Mnuchin described a carbon tax as “a tax on hard working people.”

A group of influential Republicans have been pushing for the White House to adopt a carbon “dividend” system, comparable to a tax, in recent years. However, this has hitherto made little headway and although the Trump administration is accelerating its embrace of some environmental issues, such as tree planting, it continues to stress that the main onus for action should lie with China.

Copyright The Financial Times Limited 2020