Will the EU's carbon import tax hurt poor nations?

by Joanna Gill | @JoGillJourno | Thomson Reuters Foundation
Wednesday, 30 March 2022 08:00 GMT

European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium, July 14, 2021. REUTERS/Yves Herman

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An EU border levy on climate-polluting imports aims to spur greener heavy industry - but could have costs for Africa

By Joanna Gill

BRUSSELS, March 30 (Thomson Reuters Foundation) - Battling to halve its planet-warming emissions by 2030, the European Union plans to impose the world's first carbon border tax on companies that import carbon-intensive products such as cement, steel and fertiliser.

The border levy would protect EU companies that produce greener products from their competitors abroad whose manufacturers can produce at a lower cost in part because they are not charged for their carbon emissions.

But critics say putting a carbon price on imports could have unintended consequences, such as crippling trade with less-developed economies in Africa and in turn stifling their own ability to cut emissions.

What is the 'Carbon Border Adjustment Mechanism'?

Known as the CBAM, the proposed import tariff aims to stop European firms from cutting emissions by simply transferring their polluting production outside the EU, to countries with lower environmental standards.

It would not cover all products, instead targeting carbon-heavy goods such as cement, iron, steel, aluminium, fertiliser, and electricity.

The move aims to ensure that the environmental costs of such goods are included in their price - something that is not now the case, a major reason climate-changing emissions are still rising globally, experts say.

But some have voiced concern about using a carbon tax to boost the cost of imports from less-developed economies.

How would it work?

Until now, many of the most climate-polluting industries have been given "free emissions allowances" under the bloc's Emissions Trading System (ETS).

Those aimed to ensure domestic producers were not undercut by higher-carbon importers, and that EU production was not shifted abroad, where climate policies are less strict.

The proposed new CO2 border levy is designed to replace the free ETS allowances - being gradually phased out to meet climate goals - while still avoiding "unfair" competition from cheaper imports. 

"In order for us to achieve the 2030 or 2050 targets, the ETS does need to be tightened and ... CBAM is currently the only feasible policy (proposed to replace it)," said Sanna Markkanen, a senior analyst at the Cambridge Institute for Sustainability Leadership (CISL) at Britain's University of Cambridge.

But the border tax is "far from perfect", she said.

Under the current proposal, companies importing certain carbon-heavy products to the EU would need to buy carbon certificates, equivalent to the carbon price of the same goods produced inside the bloc. 

For example, an Indian steel company that produces more emissions than a company based in Europe would have to pay the EU's per-ton CO2 price when exporting to Europe.

Will it prove effective?

Under the proposal, the tax would be phased in over a 13-year period, raising questions about whether it would be able to cut emissions quickly enough, or could potentially even drive up emissions within the EU.

According to modelling by Cambridge Econometrics, the EU would likely replace some carbon-heavy imports by increasing domestic production of the same goods.

Another point of conflict is over where the money goes. The revenues collected from the CO2 tariff would be paid into the EU's COVID-19 recovery budget, meaning taxes on poorer nations' exports benefit wealthy European countries.

"It just looks fundamentally unfair on paper," Markkanen noted.

Using CBAM tax revenue for the COVID-19 recovery fund might also break World Trade Organization (WTO) rules, according to some analysts.

"It seems a very, very protectionist measure," said Chiara Putaturo, EU inequality and tax policy advisor at Oxfam.

While the measure could have a big impact on trade with China, India and Turkey, its potential effects on less-developed countries have drawn more criticism.

How will developing countries be affected?

Goods from less-developed countries account for just 0.1% of EU imports, but a CO2 levy could have a big impact for countries exporting cement, iron, steel, and aluminium to Europe.

Those include African nations such as Mozambique, Ghana, Cameroon, Zimbabwe, Zambia and Nigeria.

Mozambique - where 60% of people live below the poverty line - sends more than half of its steel and aluminium exports to the EU. If a carbon border tax is slapped on those exports, the country could lose 1.6% of its gross domestic product (GDP), according to the Center for Global Development think-tank.

That would cut the revenue the government can pour into climate action, as well as result in significant job losses.

"What we want is a fair transition," Dimas Sinoa, a researcher from Mozambique's non-profit Centre for Democracy and Development (CDD), told the Thomson Reuters Foundation in a video call.

He said CBAM is a good tool but needs to be adjusted in light of the potentially devastating impact on low-income countries, calling for them to be exempted.

"You are targeting the wrong countries," Dimas said.

Oxfam estimates that the poorest 50% of people in the world were responsible for just 7% of emissions, while the wealthiest 10% were responsible for 50% of total carbon emissions (1990-2015).

How can it be fixed?

Nonprofits such as Oxfam want to see two things changed: a temporary exemption for poorer countries and the revenue taken in from the levy to go to support less-developed countries - a position that is largely supported by the European Parliament.

Another proposed alternative is so-called "climate clubs" of countries acting to lower emissions, an idea floated by the chancellor of Germany, which currently heads the G7.

Members - which could include poorer countries - would agree how to measure CO2 emissions, agree to a minimum charge for producing them, and decide on a carbon border adjustment mechanism as a group.

Still, Markkanen questioned whether the climate measures needed to join such a club could feasibly be implemented in developing countries.

In any case, she said the revenue generated by a carbon border tax would be small and decline over time, as more countries green their production and energy supplies.

"If CBAM is successful in achieving what it set out to do, it will make itself useless within the next decade," she said.

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(Reporting by Joanna Gill, Editing by Laurie Goering and Helen Popper. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)