Leaning Towards Pro-EU and Less Towards Anti-Carbon

The European Union has set lofty goals for its transition to a low-carbon economy. Carbon pricing is one of the tools it has implemented. The Emission Trading System, which has been in force for a while, has already had a favourable influence. According to early indications, a new, more stringent carbon price scheme will reduce emissions in European industry even more. 

The European Union has set lofty goals for its transition to a low-carbon economy. Carbon pricing is one of the tools it has implemented. The Emission Trading System, which has been in force for a while, has already had a favourable influence. According to early indications, a new, more stringent carbon price scheme will reduce emissions in European industry even more. 

The carbon price has a negligible impact on competitiveness, according to the World Bank’s Carbon Pricing Leadership Coalition, hence the EU is exploring a complex compensatory mechanism dubbed the Carbon Border Adjustment Mechanism  (CBAM) as part of its Green Deal. Simply expressed, the EU will levy a carbon tax on items imported from nations with greater embedded carbon levels than those found in the EU. According to estimates, if the CBAM is applied to all ETS-covered commodities, up to $16 billion in developing-country exports to the EU might be subject to a surcharge. 

CBAM is expected to prevent carbon leakage into the European Union. While a combination of a carbon tax within the EU and CBAM will achieve this goal, a UNCTAD paper (bit.ly/3hTZzq6) also reveals that CBAM’s incremental influence on decarbonisation will be negligible. While a prospective EU domestic carbon price of $44 on all emissions reduces global emissions by 13% — and by 21% in the case of a carbon price of $88—the CBAM only adds 0.8 to 1.3 percentage points. As a result, CBAM becomes less of a carbon-reduction instrument and more of a tool for levelling the playing field in EU trade. The UNCTAD article goes on to list a few further CBAM effects. CBAM will lower EU trade with other areas while increasing intra-EU trade, according to this analysis. It also states that imports from emerging countries will decrease, while exports from the EU will rise. The real impact will differ from country to country, owing to a single historical accident—a country’s mix of sources for generating electricity. 

Even if it had the world’s largest renewable energy programme, huge emerging countries like India will be at a disadvantage since coal’s dominance as a source of power will not change rapidly. The attractiveness of nations as a source of imports will be re-ordered by CBAM. In the case of steel, China and Russia will be subjected to higher tariffs than Turkey and India, which will be worse off than Thailand and Vietnam. 

Many nations, including Australia, India, and Serbia, are likely to lose money as a result of CBAM, whereas income implications in countries excluded from CBAM are expected to be positive. This corresponds to an expected increase in unemployment in countries like Kazakhstan, Serbia and Bosnia and Herzegovina, Saudi Arabia, and Ukraine, as well as nations in North Africa and Central Asia, whose exports to the European Union are dominated by products that face the CBA. 

With negligible incremental decarbonisation over an EU carbon tax and negative effects for fairness in terms of trade, income, and employment, there is motivation to consider alternative methods that better enable the core goal of decarbonisation to be achieved. 

If CBAM is allowed for deployment, one possible positive externality is the likelihood of faster adoption of technology like clean hydrogen in nations with high emissions. It’s reasonable to wonder if a concentrated effort to make clean hydrogen, renewable energy, and battery storage more economically viable by aggregating demand and leveraging economies of scale could have a greater decarbonization impact and fewer negative externalities than the CBAM. 

Photo Credit: https://www.esg.quick.co.jp/research/1059