EU should consider International trade impacts of CBAM; UNCTAD Report

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UNCTAD( United Nations Conference on Trade and Development) has warned 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 has less effect on mitigating climate change.

The UNCTAD report published on 14 July shows the CBAM’s potential implications on international trade, carbon dioxide (CO2) emissions and also the income and employment for countries inside and outside the EU, with more attention on developing and vulnerable countries.

According to the CBAM, it is expected to introduce new CO2 emissions-cutting measures transitionally in 2023 and finalize them before 2026.

“Climate and environmental considerations are at the forefront of policy concerns, and trade cannot be the exception. CBAM is one of these options, but its impact on developing countries also needs to be considered,” said UNCTAD Acting Secretary-General Isabelle Durant.

The report highly emphasizes that introducing the CBAM would decrease part of the carbon leakage produced by the different climate change ambitions between the EU and other countries.

Impact on exports in carbon-intensive sectors  

The report also says several of the EU’s trading partners exporting goods in carbon-intensive sectors; cement, steel, aluminium, oil refinery, paper, glass, chemical and fertilizers have raised concerns. According to them, CBAM would substantially curtail their exports.

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.

However, the effects would vary from country to country depending on their export structure and carbon production intensity. So 20 most-exposed countries including the UK, China, Russia, India, Canada in terms of aggregated value of exports in selected sectors is considered in CBAM.

In both scenarios, developed countries, as a group, would have less effect on export declines since many tend to employ production methods that are less carbon-intensive in the targeted sectors than many developing nations.

According to the analysis of UNCTAD, 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. So the report says, “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 ”

However, developed countries would encounter a higher welfare loss of $51 billion from the initial introduction of a carbon price of $44 per tonne, including losses in the EU, while developing countries would gain $1 billion in the absence of the CBAM.

Impact on the EU’s economy

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

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 mechanism wouldn’t fully compensate for the negative effects of the carbon tax on the EU’s economy.

Impact on mitigating climate change

Although the CBAM would be effective in reducing carbon leakage, it has less value in mitigating climate change, the report says, as the mechanism would cut only 0.1% of global CO2 emissions.

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.

UNCTAD urges the EU to consider deploying CBAM flanking policies capable of narrowing, and eventually eliminating, the gaps between developed and developing countries. This will be beneficial in terms of greening the economy and fostering a more inclusive trading system.