EU urged: Consider impact of new climate mechanism

Although a new European Union (EU) climate initiative unveiled recently could change global trade patterns to favor countries where production is relatively carbon efficient, its value in mitigating climate change will likely be limited, the UN trade and development agency, UNCTAD, has warned.

The Carbon Border Adjustment Mechanism (CBAM) comes into force in 2023 as part of new measures to cut carbon dioxide (CO2) emissions, including taxes on imports such as oil, coal and gas.

In tandem with the EU announcement, UNCTAD has published a report examining the potential implications for countries both within and outside the regional bloc.

“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 Isabelle Durant, the UNCTAD Acting Secretary-General.

The CBAM will help reduce “carbon leakage,” a term that refers to transferring production to jurisdictions with looser constraints on emissions, the report confirmed.
However, its value in mitigating climate change is limited, as the mechanism would cut only 0.1 percent 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 said.

“Reducing these emissions effectively will require more efficient production and transport processes.”

UNCTAD also addressed concerns expressed by EU trade partners who believe the CBAM would substantially curtail exports in carbon-intensive sectors such as cement, steel and aluminium.

Changes may not be as drastic as some fear, the agency said.

Exports by developing countries would be reduced by 1.4 percent if the plan is implemented with a tax of $44 per ton of CO2 emissions, and by 2.4 percent at $88 per ton.
Effects would vary significantly by country, depending on their export structure and carbon production intensity.

At the $44 per ton price, developed countries would see their incomes rise by $1.5 billion, while income in developing countries would fall by $5.9 billion, according to the report.

UNCTAD encouraged the EU to consider using some of the revenue generated by the CBAM to accelerate cleaner production technologies in developing countries.

“This will be beneficial in terms of greening the economy and fostering a more inclusive trading system,” said Durant, the agency’s interim chief.