How to decarbonize global trade in a fair way

Bombay: Steel, cement and fertilizers are all the main export products of developing countries and their production is very polluting. Should rich countries impose a carbon tax on borders to penalize emissions from these industries in developing countries, hopefully encouraging them to adopt greener technologies? Or will it just impose a cost on developing countries and leave them without the money or technology to green these industries?

Issues like these are being debated at the ongoing 26th Conference of the Parties, where world leaders are negotiating on carbon market rules under Article 6 of the Paris Agreement. These rules would put a price on carbon emissions and allow international sales of carbon credits.

A border carbon tax is one of the carbon pricing tools suggested by developed countries. But unless rich countries help developing economies like India access the funds and technology needed to transition to clean alternatives, a border carbon tax penalizes the export of high-intensity products. carbon such as steel and cement would be unfair, experts say. This would have an impact on growth and employment opportunities in developing countries, they point out.

Decarbonize international trade

Why has the decarbonization of world trade become imperative? About 27% of global carbon dioxide emissions in 2015 were linked to international trade, according to an Organization for Economic Co-operation and Development (OECD) paper published in 2020. These issues are concentrated in exports seven industries – mining and extraction of energy products; textiles and clothing; non-metallic chemicals and minerals; computers, electronic and electrical equipment; machinery and equipment; and motor vehicles.

There are already carbon taxes on products manufactured in the country. The European Union (EU), for example, has a Emissions trading system (ETS) where it caps greenhouse gas emissions for industrial units and those that do not cap their emissions can buy “allowances” from those who have made larger cuts.

However, the national carbon tax differs between EU countries. For example, Sweden’s carbon tax costs around $ 137 (Rs 10,191) per metric ton of carbon dioxide while Switzerland charges $ 101 (Rs 7521).

“Fooling the poor countries”

The Carbon tax is a levy imposed on the combustion of carbon-based fuels during the manufacture of a product. When a country sells carbon-intensive products, these are taxed at the border of the importing country.

In July 2021, the EU imposed a border tax on imports of carbon-intensive products as part of its strategy to reduce greenhouse gas emissions by at least 55% by 2030. But the movement has attracted critical India, Brazil, South Africa and China for being “discriminatory”.

The EU is India’s third largest trading partner and represents 62.8 billion euros ($ 74.5 billion) in merchandise trade in 2020, or 11.1% of India’s total world trade. By increasing the prices of products made in India in the EU, this tax would make Indian products less attractive to buyers and could reduce demand, we reported in July 2021.

The idea of ​​a border carbon tax imposed by developed countries was critical in October 2021 by the United Nations Conference on Trade and Development for potentially weighing on developing economies that still rely heavily on coal, limiting their exports and constraining their budgets for climate action. If taxed, taxed countries could suffer a substantial loss of income from prices imposed on exports, lose their competitive advantage and are forced to remain net importers with low production capacities, the report. In 2019, export tariff revenues earned by developing countries amounted to $ 15 billion.

Benefits of the carbon tax

The national carbon tax, as opposed to a globally imposed tax, poses a problem, as the EU’s experience has shown. This leads to carbon leak: This means that given the high cost for some companies to operate within the EU, they relocate to countries with more flexible emission limits.

It was to deal with this that the EU suggested the extension of the carbon tax on cross-border trade because it would allow countries to maintain their competitive advantage.

The strength of a border carbon tax lies in its potential ability to shift the burden of mitigating the damage caused by climate change to the market players who are actually responsible for it, according to the report. world Bank. it would be to encourage producers to adopt clean technologies and innovate in the market.

The carbon tax can also help address the complications created by the difference between emissions produced and consumed in an interconnected global economy, said Aman Srivastava, researcher at the Policy Research Center. The tax would identify the exact origin of emissions and reduce the cases of exported emissions.

Disadvantages of a border carbon tax

The carbon border tax expects developing countries to adhere to environmental standards set by developed countries and this violates the principle of “common but differentiated responsibility” (CBDR) in the Paris Agreement, a declared by UNCTAD of October 2021 report. The principle recognizes and compensates for the fact that rich nations have historically emitted much more carbon than poorer nations, who also suffer much more from the impacts of climate crises.

For developing countries, a carbon trading tax has several pitfalls, as discussed above. In countries whose economic structures depend on energy-intensive activities, such as major steel and cement exporters, competitive disadvantages in international markets could lead to job losses, according to UNCTAD July 2021. report. The report analyzed the implications of the EU border carbon tax on developing countries.

“With the EU’s carbon tax at borders, countries, including developing countries, risk being taxed for emissions that do not even contribute to their own domestic consumption. This adds an element of injustice, on top of trade and other climate equity concerns, ”said CPR’s Srivastava.

There are no protocols in place yet on the appearance of a carbon tax at borders, but they should take into consideration the needs of developing economies, experts said. “The developing world has already suffered from the failure of rich countries to reduce their emissions fast enough and their failure to meet their financial commitments,” said Ashish Fernandes, Managing Director of Climate risk horizons, a Bengaluru-based organization working on the impact of the climate crisis on financial systems. “A carbon border tax that will hurt exports and jobs in developing countries would be a bit of a salt in the wound.”

Like us reported in October, in 2009, developed countries had promised provide developing countries with an annual climate fund of $ 100 billion by 2020. But only about 65% of the $ 100 billion pledged was provided by developed countries on average between 2013 and 2019 and most in the form of loans expensive.

Alternative approaches

The one-size-fits-all approach would not be effective for carbon taxation, said CPR’s Srivastava, adding that countries have different capacities to compete.

October 2021 UNCTAD report also suggested a differentiated approach for developing and developed countries that would be more equitable. This forces developed countries to make clean technology more accessible – by removing intellectual property rights or patents, for example, or providing financial support to help poor countries cover the additional cost of their purchase, according to the report. .

Countries could also develop a carrot and stick carbon tax system, said Fernandes of Climate Risk Horizon. For example, developed countries could set progressive emission reduction targets on products imported from developing countries, on the basis of which they could provide access to finance.

New clean technologies such as cheaper solar panels, green hydrogen technology and methods of extracting energy from ocean tides must be prioritized for climate action because global emissions cannot be stabilized with existing technologies, experts say.

In developed countries, where most technological developments take place, patents are used to encourage innovation, but these also end up making them unaffordable for the poorest economies. For example, hydrogen-based green steel is already being developed by European companies like ArcelorMittal and Thyssenkrupp, we reported in September 2021. But, in India, the challenge is to make this transition economically competitive and commercially viable, it has been said.

We reached out to the Ministry of Trade and Commerce for their comments on the EU carbon tax on November 3. We will update when we get a response.

We welcome comments. Please write to [email protected] We reserve the right to change responses for language and grammar.

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