How will the EU's new carbon border tax affect developing nations?
Metal coils are unloaded from a train at the ArcelorMittal steel plant in Ghent, Belgium, May 22, 2018. REUTERS/Yves Herman
What’s the context?
Applied to global trade, the Carbon Border Adjustment Mechanism seeks to force down industry emissions to curb climate change
- EU adopted world’s first carbon border tax in May 2023
- Imports of some high-carbon goods will be taxed from 2026
- Set to lose income, some developing nations push back
NEW DELHI - To help reduce its planet-heating emissions, the European Union adopted the world’s first carbon border tax in May, which comes into effect from the start of 2026 and has raised concern among exporting nations in the developing world.
Under the Carbon Border Adjustment Mechanism (CBAM), the EU will tax imports of goods whose production emits high levels of carbon emissions, beginning with cement, iron and steel, aluminium, fertilisers and electricity.
By 2034, the tax will cover all goods exported to the EU.
But the regulatory process starts already this October, when businesses trading with the EU must share emissions data relating to their products with importers - an obligation that analysts say will place a heavy burden on smaller companies.
Several other wealthy countries including Britain, Canada, Japan and the United States are considering similar taxes.
Some poorer nations have criticised the new CBAM, calling its blanket imposition on all trading partners discriminatory.
Here we look at the CBAM's potential to reduce emissions - and what it might mean for the EU's trading partners.
What is the main goal of the EU carbon border tax?
The European Union has an Emissions Trading System (EU-ETS) based on a "cap-and-trade" approach, whereby it sets a cap on the emissions an industry can emit and then companies trade emissions allowance certificates to stay within those limits.
The system sets a price on carbon emissions in polluting industries, making investing in efficient production and clean power sources more attractive to them. The ETS has helped the EU cut its industrial emissions by about 35% between 2005 and 2021.
The EU is now further tightening the system as part of its "Fit for 55" package, a series of laws to achieve its key climate goal of reducing emissions by at least 55% from 1990 levels by 2030, including through the CBAM.
The CBAM aims to prevent emissions "leakage" from the EU-ETS, which could happen if production physically shifts to countries with a lower - or no - carbon price, or if EU importers source goods that are cheaper because they do not have to factor in the cost of their carbon emissions, experts said.
Can the EU’s CBAM achieve meaningful global emissions cuts?
Evidence to date suggests that the CBAM and similar systems planned by other countries may have only limited effect in curbing emissions at the global level.
In 2015, carbon emissions from international trade accounted for about 27% of global emissions, meaning goods and services consumed in the countries where they are produced are responsible for a far higher share, according to a 2021 report by the United Nations Conference on Trade and Development (UNCTAD).
Measures to curb emissions at the national level can thus “play a much greater role than international trade policies”, it noted.
Another 2021 UNCTAD report estimated that, at a carbon price of $44 per tonne, a CBAM tax on imports would reduce global emissions by only 0.1%, while the EU’s emissions would decline by 0.9%.
The EU's own assessment projects that the CBAM would result in a 13.8% reduction in the bloc's emissions by 2030, compared with 1990 levels, and a cut of about 0.3% for the rest of the world.
How would an EU carbon border tax affect other countries?
The CBAM would have a financial impact on the EU's trading partners in the sectors covered by the tax, especially least-developed countries.
According to Aaron Cosbey of the International Institute for Sustainable Development (IISD), this is because the amount of trade affected as a percentage of gross domestic product would be bigger for a poor nation like Mozambique - at over 5% - than for major trading partners such as Russia, China and Britain.
The CBAM could have negative consequences for poorer nations in terms of income, as trade volumes rise between EU states and fall outside the bloc, UNCTAD said, estimating that developing-country incomes would decline by a combined $5.86 billion at an EU carbon price of $44 per tonne.
Impacts for developing countries could expand dramatically once the CBAM is extended to more sectors or if other developed nations introduce similar measures, analysts said.
Some countries, however, might actually benefit from the EU tax - for example, a large chunk of China's steel production is cleaner than steel produced in the EU, and its exports could rise, Cosbey noted.
Is the CBAM in line with global trade rules?
Many developing countries regard the CBAM as a bad precedent that renders the anti-protectionism rules of the World Trade Organisation (WTO) and free trade agreement commitments meaningless, said Ajay Srivastava, an India-based trade expert and founder of the Global Trade Research Initiative.
Ministers from the BASIC group of countries - Brazil, South Africa, India and China - called in a 2022 statement for "unilateral measures and discriminatory practices, such as carbon border taxes" to be avoided, as they could result in market distortion and "aggravate the trust deficit" among countries.
They urged united opposition among developing nations to "any unfair shifting of responsibility (for) reducing emissions from developed to developing countries", noting BASIC countries have emissions reduction strategies and require finance, access to technology and global markets to put them into practice.
In June, China tabled a proposal for multilateral discussions on carbon border taxes at the WTO.
Cosbey of the IISD noted that any ruling from the WTO on the legality of the CBAM could take years.
"Even if it is found to be illegal... our prediction is that it will not change the course of EU legislation," he added.
When a measure is in breach of WTO rules, a country can either remove or alter it to bring it into compliance - or pay damages.
In past cases, the EU has chosen to pay trading partners - and the political capital it has invested in the CBAM probably means it would choose to cover the damages again, Cosbey said.
The EU, however, has stated that the carbon tax has been designed in full compliance with WTO rules and that the CBAM will promote cleaner and more efficient production in other countries.
(Reporting by Bhasker Tripathi; Editing by Megan Rowling)
The article was updated on June 22 to correct typographical errors.
- Carbon capture and storage
- Carbon offsetting