EU new green tax on not decarbonized imports, potentially damaging both developing and developed economies, UNCTAD warns

The European Commission presented today a package of meassures oriented to achieve the target of effectively reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.

Among the meassuresa there’s one new tax called the Carbon Border Adjustment Mechanism (CBAM) that will put a carbon price on imports of a targeted selection of products to ensure that ambitious climate action in Europe does not lead to ‘carbon leakage’.

Exports likely to be affected by CBAM_by country

The CBAM that will be the same in all EU countries and its quantity centrally decided by the UE aims to ensure that European emission reductions contribute to a global emissions decline, instead of pushing carbon-intensive production outside Europe. It also aims to encourage industry outside the EU and the European Union’s international partners to take steps in the same direction.

The green package of meassures announced today has been well received everywhere in the developed world, but UNCTAD sees some potential risks both for developed and for developping economies, specially derived from the CBAM.

“Climate and environmental considerations are at the forefront of policy concerns, and trade cannot be the exception. CBAM (carbon border adjustment mechanism ) is one of these options, but its impact on developing countries also needs to be considered,” UNCTAD Acting Secretary-General Isabelle Durant said.
The United Nations Conference on Trade and Development finds that the European Union (EU) Carbon Border Adjustment Mechanism (CBAM) could change trade patterns in favour of countries where production is relatively carbon efficient but do little to mitigate climate change.

Scarce 0,1% reduction in global greenhouse emissions while not encouraging greener production lines in developing countries

While the mechanism seeks to avoid the leakage of production and CO2 emissions to the EU’s trading partners with less stringent emissions targets, it’s so far unclear how it can support decarbonization in developing countries.

“Reducing these emissions effectively will require more efficient production and transport processes,” the report says and improving production and transport processes need for investment.

UNCTADreport_CBAM_main green house gas country emmiters

UNCTAD urges the EU to consider deploying CBAM flanking policies capable of narrowing, and eventually eliminating, the gaps between developed and developing countries.

“The EU could consider using some of the revenue generated by the CBAM to accelerate the diffusion and uptake of cleaner production technologies in developing countries,” Ms. Durant said. “This will be beneficial in terms of greening the economy and fostering a more inclusive trading system.”

Developing countries will pay the price of CBAM in exports reduction, UNCTAD report shows

Several of the EU’s trading partners exporting goods in carbon-intensive sectors have raised concerns that the CBAM would substantially curtail their exports, but these changes may not be as drastic as some fear. However, the effects would vary significantly by country depending on their export structure and carbon production intensity.

impact in Export and carbon leakage by CBAM_by country_region
© UNCTAD. Click on the image to enlarge it

Exports by developing countries across the targeted carbon-intensive sectors would be reduced by 1.4% if the CBAM is implemented with a price of $44 per tonne of embedded CO2 emissions, and by 2.4% if it’s implemented with an $88 per tonne price, the report shows.

In both scenarios, developed countries, as a group, wouldn’t suffer export declines since many tend to employ production methods that are less carbon intensive in the targeted sectors than many developing nations.

Developing countries will also pay the price in terms of welfare

“The CBAM would generate a similar gap between developing and developed countries in terms of welfare. In both cases, developed countries would fare better than developing ones,” the report states.

UNCTADreport_CBAM_effects on income

With a CBAM based on a carbon price of $44 per tonne, the income of developed countries would rise by $2.5 billion, while that of developing nations would fall by $5.9 billion, according UNCTAD’s analysis. Developing countries would gain $1 billion in welfare with no CBAM in place.
Potential employment effects would be small for most economies, the report shows.

Money from the CBAM wouldn’t fully compensate its negative effects on the EU’s economy

Increased carbon prices would significantly reduce carbon emissions in the EU, but the world’s largest trading bloc’s exports would decline, the report says.

True that a CBAM based on a carbon price of $44 per tonne of CO2 embedded emissions would reduce the carbon leakage resulting from the implementation of climate policies in the EU by more than half, from 13.3% to 5.2%.
But the money obtained with this import tax will no way fully compensate the negative effects of the carbon tax on the EU’s economy.
Cost inflation derived from components produced in developing countries would generate a hike in prices of goods produced inside the EU.

UNCTAD report estimates that developed countries would experience a higher welfare loss of $51 billion from the initial introduction of a carbon price of $44 per tonne, driven by losses in the EU, while ,as pointed above, developing countries would gain $1 billion in the absence of the CBAM.

Image over th headline.- Isabelle Durant (Acting Secretary General UNCTAD). Image from Wikimedia Commons. To watch the original photo and read the terms of the lisense click here,_Deputy_Secretary-General_of_UNCTAD.jpg

Related external links:

To read UNCTAD report “A European Union Carbon Border Adjustment Mechanism: Implications for developing countries”, click here

EU CBAM Regulation

The European Green Deal (set of proposal presented by de EU Commission today)

Delivering the European Green Deal (additional information)

Related Eastwind links:

World electricity demand outpaces renewables driving strong push in fossil fuels generation and greenhouse gas emissions, IEA warns

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