The EU's Carbon Border Tax: What Reactions Can Developing Nations Take?

 

To help you as Carbon Border Adjustment Mechanism, The CBAM was eventually approved in May 2023 following four years of hard talks between the European Commission (EC), the Member States, and the European Parliament. The EC first proposed it in 2019 as part of the European Green Deal. The primary goal of the CBAM is to level the playing field for European businesses responsible for paying for production-related CO2 emissions with non-EU importers. The EU intends to prevent "carbon leakage," in which companies relocate their manufacturing to nations with laxer climate regulations, by imposing a tax on importers from the EU equal to the difference between the EU carbon price and the carbon price in the country of origin, if any. The levy is also essential for raising funds for the EU budget, reducing its reliance on contributions from Member States.

As an expert Carbon Border Adjustment Mechanism, CBAM will impact developing nations in terms of decreased GDP and lower trade volumes. By 2030, the European Commission projects that the tax on CBAM goods sold inside and outside the EU will bring in €9.1 billion annually. These proceeds will be used by the European Commission (EC) to pay back the loans made under Next Generation EU, the EU's 2020 COVID-19 recovery package. The voices of low- and middle-income nations lost two significant battles in these negotiations. First, least-developed countries (LDCs) will not be granted an exemption under the Camlin comparison, the EU's Everything Except Arms (EBA) program eliminates tariffs and quotas on all commodities imports from LDCs into the EU, except arms and ammunition. Second, the LDCs' attempts to decarbonize will not be financed with CBAM earnings.

In our understanding as Carbon Border Adjustment Mechanism, The idea was omitted from the final text because Member States needed to support it, even though the European Parliament had initially adopted a similar position’s may cause a drop in African exports to the EU of up to 13.9% for aluminum, 8.2% for iron and steel, 3.9% for fertilizer, and 3.1% for cement. However, some of these exports may be redirected to other markets, such as China and India. A 0.5% decrease in GDP and income throughout the continent is possible (this may seem tiny, but it is four times larger than the GDP advantages that the EU receives from its trade relationship with Japan). There will be more significant effects on some nations (and industries) than on others if they export large quantities of the impacted goods to the EU.

Being an Carbon Border Adjustment Mechanism, According to a collaborative study by the LSE and the African Climate Foundation of the leading economies/regions, Africa would be the most badly impacted. In a prior study conducted at CGD, we calculated that CBAM may cause Mozambique's GDP to decline by 1.6%; however, the more thorough approach of the LSE modeling indicates that this would be significantly less given the country's exports are redirected. Expanding the EU's carbon market scope is already underway, and the global trade implications of a larger CBAM might be enormous. African exports to the EU may decline by 5.72% and the continent's GDP by 1.12% in a scenario in which all exports to the EU would be covered by CBAM and at a carbon price of €87 per ton.

We believe as an Carbon Border Adjustment Mechanism, such expansion can also cause big losses in Asia. Including plastic products with high carbon intensity in the CBAM would result in a 0.6% and 0.2% GDP decline for Vietnam and Thailand, two significant exporters. Low- and middle-income nations are considering policy solutions to these effects. The EU hopes that by implementing carbon pricing in the key industries, the CBAM will inspire other countries to follow suit. To determine if lower-income nations have successfully imposed carbon prices, we have examined the World Bank's database on carbon pricing. Measuring GHG concentration can be pretty straightforward in some situations, like evaluating oil, and extremely difficult in others, like measuring methanol. Because different countries and producers have varying reporting standards and data is not readily available, verifying the GHG intensity of commodities is challenging.