New EU carbon border tax to impact trade while CO2 emissions barely budge – UN report

A ThyssenKrupp coking plant in Duisburg, Germany, in January, 2020. (Keystone/AP/Martin Meissner)

The new EU carbon border tax unveiled on Wednesday will take a toll on exports but have a limited impact on climate change, a new report states.

The European Union’s carbon border tax designed to tackle “carbon leakage” will affect exports from developing countries while only reducing 0.1 per cent of global CO2 emissions, according to a report from the UN Conference on Trade and Development (UNCTAD). 

The analysis was released on Wednesday on the same day that the EU unveiled the details of its strategy to drastically cut its carbon emissions by 2050, including a proposal for the world’s first carbon tariff on imports from countries with less ambitious rules for slashing their greenhouse gas emissions.

The carbon border adjustment mechanism (CBAM), set to be launched in 2023, will require importers of goods such as cement or steel to buy digital certificates that match the carbon price that would have been paid, had the goods been produced under the EU's carbon pricing rules.

The aim is to level the playing field for domestic companies making efforts to reduce their carbon footprint and prevent carbon leakage, a situation where enterprises move their production activities abroad to countries with more lax emissions policies.

Currently, EU firms have to work under the Emissions Trading System, which sets a cap on the total amount of carbon emissions they can produce and which is reduced over time. The companies have to buy or receive allowances to cover their emissions through the ETS. The carbon border tax intends to ensure that domestic companies remain competitive and are not tempted to relocate.

UNCTAD’s findings, which analyse various scenarios, show that a price of $44 per tonne of CO2 would cut carbon leakage by half. But the measures would also affect trade, which  some of the EU trade partners, including the US, had raised concerns about.

According to the study, at that price, developing countries would suffer a blow, with their exports from carbon intensive sectors such as steel, cement and oil, retreating by 1.4 per cent.

The measure would also take a toll on EU exports but developed countries would globally remain unaffected since those using more carbon efficient processes and technologies in those same sectors would be favoured, widening the income gap between the wealthier and poorer nations.

Countries will be affected differently depending on how green their production is, Carlos Razo, author of the report explained to Geneva Solutions. “The problem is that there is a lot of heterogeneity. It is not enough to know who exports what or how much they export, but it matters how they produce that,” he said.

Exports to the EU in 2019 in sectors likely to be considered in the CBAM in 20 most exposed countries in terms of aggregated value of exports (billion $). (Credit: UNCTAD report)

Another concern is the impact it will have on least developed countries which make up a small part of EU imports but for which a decline in trade could heavily hurt their economies.

In the detailed plans released by the European Commission, it is stated that making exceptions for least developed countries should be avoided as to not encourage carbon intensive industries in those countries. Instead, the EU could opt for targeted measures such as technology transfer, capacity building or financial support.

Razo stressed that the EU could make up for the impact on the developing world by supporting the green transformation in those countries.

“At the end, it's something that everybody will benefit from, because emissions anywhere, are a threat to prosperity everywhere,” he noted, adding that  “that would also give them [developing countries] an opportunity to better integrate themselves into the international trading system.” 

While the CBAM might have limited impact on emissions, it could also have a knock on effect by encouraging other countries to follow suit. In the US, Canada and the UK there are already debates around developing their own carbon levy. “It is not only about what [the mechanism] produces today, but globally as a potential chain reaction that other countries might follow,” Razo observed. 

In a more negative scenario, commentators have suggested that the carbon border tax could spark retaliatory tariffs from other world powers such as the US, Russia and China, which have spoken against the measure. They could also decide to turn to the World Trade Organization to challenge it for being incompatible with global trade rules. 

Razo noted that their study was made under the assumption that the proposed mechanism would be WTO compatible. “There are certain challenges but there are also exceptions when there are other objectives like environmental objectives, so there is still room for compatibility,” he said.