Carbon border taxes must not penalise poor countries

The European Union (EU) takes its climate commitments seriously. In 2019, it launched the European Green Deal, designed to cut CO2 emissions by 55% by 2030 and achieve carbon neutrality by 2050. The programme encompasses a number of internal and external policy measures, including the European Union Deforestation Regulation (EUDR, see global #92). Another key European trade policy project is the CBAM, or Carbon Border Adjustment Mechanism. Its purpose is to make importing industries subject to the same rules as polluting European enterprises. The latter must observe a cap on emissions, which, by the way, they can trade on the "carbon market" in order to comply with the limits set. These measures are designed to render investment in clean energy in Europe cheaper and more attractive. "The CBAM will encourage global industry to adopt greener technologies," European Commissioner for Economic Affairs Paolo Gentiloni has said.

Avoiding carbon leakages

Brussels adopted the CBAM in order to prevent production from moving to countries where the price of carbon is lower than in the EU, or even zero (known as "carbon leakages"), or to shield European producers from unfair competition. Under this mechanism, imports of particularly polluting products will be taxed at the border, starting with iron and steel, cement, fertilisers, aluminium, hydrogen and electricity. It took effect in the EU on 1 October 2023 and is being implemented in successive phases; the mechanism will be fully deployed as of 2026. Starting in 2031, it is expected to cover all imports.

Poorer countries affected

The fundamental question is whether the measure is effective. The EU is optimistic. It estimates that its emissions will decline by 13.8% by 2030, while those of the rest of the world will be down by 0.3% compared with 1990. But the approach elicits sharp criticism from the countries of the Global South, which assert that it is negatively impacting their development. Others criticise it for failing to provide a general waiver, at least for the poorest countries. Moreover, UN Trade and Development (UNCTAD) has calculated that the impact on climate is expected to be minimal: the CBAM will reduce global CO2 emissions by a mere 0.1%, while EU emissions will diminish by 0.9%. It is nonetheless expected to boost the revenue accruing to developed countries by USD 2.5 billion while reducing the revenue going to developing countries by USD 5.9 billion.

In 2022, ministers from Brazil, South Africa, India and China called for discriminatory measures such as carbon taxes at borders to be avoided. The countries most affected by this mechanism are the emerging countries that are the leading exporters of steel and aluminium to Europe, namely, Russia, Turkey, China, India, South Africa and the United Arab Emirates. But Least Developed Countries (LDCs, a category created by the United Nations) such as Mozambique (aluminium) and Niger (uranium ore) will also be impacted. The welfare losses to developing countries like Ukraine, Egypt, Mozambique and Turkey are put at EUR 1–5 billion, a substantial amount considering their gross domestic product (GDP).

An exemption for LDCs

Let us take Africa, which is home to 33 of the 46 LDCs. A recent study by the London School  of Economics concludes that if the CBAM were applied to all imports, Africa's GDP would contract by 1.12% or EUR 25 billion. Aluminium exports would decline by 13.9%, iron and steel by 8.2%, fertilisers by 3.9%, and cement by 3.1%. So, should the baby be thrown out with the bathwater and the CBAM declared to be anti-development? Probably not. The Belgian NGO 11.11.11. proposes that the least developed countries be exempted from this mechanism, at least initially, under WTO rules; or that they be taxed less than the others. When the CBAM was being discussed in Brussels, this possibility was considered then jettisoned by the Parliament, as the EU opted to secure more revenue. UN Trade and Development suggests returning the revenue from the mechanism to the LDCs to fund their climate transition. The EU is expected to garner revenue of EUR 2.1 billion, which could be channelled multilaterally via the Green Climate Fund, itself currently underfunded.

No CBAM in Switzerland for the time being

For now, there is nothing of the kind in Switzerland. Goods originating in Switzerland and exported to the EU are currently exempt from the CBAM by virtue of the Emissions Trading System (ETS), and the Federal Council has opted not to introduce any such mechanism for products being imported into Switzerland. The ETS represents the maximum amount of emissions available to industries in a particular economic sector. Each participant is allocated a certain quantity of emission rights. If their emissions remain below this limit, they may sell their rights. If they exceed the limit, they may purchase rights.

A parliamentary initiative was submitted to the National Council in March 2021 calling on Switzerland to amend the CO2 Act to include a border carbon adjustment mechanism, taking account of developments in the EU. Currently, that parliamentary initiative is still being discussed in the committees. The CBAM could be an effective trade measure for reducing imported CO2 emissions. But should Switzerland ever adopt it, it would have to make sure not to penalise the poorest countries, instead granting them exemptions, and returning a substantial part of the accrued revenue to assist them in making the energy transition.