Steel, cement and fertilizers are the main exports of developing countries, and their production is highly polluting. Should rich countries impose a tax on the carbon frontier to penalize the emissions of these industries in developing countries, in the hope of encouraging them to adopt greener technologies? Or will it simply impose a cost on developing countries and leave them stranded without the money or technology to green these industries?
Issues like these are being discussed at the 26th Conference of the Parties, where world leaders are negotiating rules on carbon markets in accordance with Article 6 of the Paris Agreement. These rules would put a price on carbon emissions and allow for international sales of carbon credits.
A carbon border tax is one of the carbon pricing tools suggested by developed countries. But unless rich countries help developing economies like India to access the funds and technology needed for the transition to clean alternatives, a border carbon tax would penalize the export of energy-intensive products in India. carbon like steel and cement would be unfair, experts say. They point out that it would affect growth and employment opportunities in developing countries.
Decarbonization of international trade
Why was the decarbonisation of world trade essential? About 27% of global carbon dioxide emissions in 2015 were related to international trade, according to an article by the Organization for Economic Co-operation and Development (OECD) published in 2020. These emissions are concentrated in the world. exports of seven industries: mining and extraction of energy-producing 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 domestically manufactured products. The European Union (EU), for example, has an emissions trading system (ETS) where it limits greenhouse gas emissions from industrial units and those who fail to limit their emissions can buy “bonuses” to those who have made deeper cuts.
However, the internal carbon tax differs between EU countries. For example, the Swedish carbon tax costs about $ 137 (10,191 rupees) per metric ton of carbon dioxide while Switzerland charges $ 101 (7,521 rupees).
“Burden of poor countries”
The carbon tax is a tax that is levied on the combustion of carbon-based fuels while a product is being produced. When a country sells carbon-intensive products, they 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 measure provoked criticism from India, Brazil, South Africa and China for being “discriminatory”.
The EU is India’s third largest trading partner and accounted for € 6.8 billion ($ 74.5 billion) in trade in goods in 2020, or 11.1% of India’s total global trade. By raising the prices of Indian-made products in the EU, this tax would make India’s goods less attractive to buyers and could reduce demand, we reported in July 2021.
The idea of a carbon tax imposed by developed countries was criticized in October 2021 by the United Nations Conference on Trade and Development to potentially burden developing economies that are still heavily dependent on coal, limiting their exports and restricting its budget for climate action. If imposed, taxed countries could face a substantial loss of revenue due to export tariffs, lose their competitive advantage and be forced to remain net importers with little production capacity, the report states. . In 2019, export tariff revenues from developing countries amounted to $ 15 billion.
Advantages of the carbon tax
The internal carbon tax, as opposed to the global tax, has a problem, as the EU experience has shown. It leads to carbon leakage: this means that given the cost to some companies of operating within the EU, they are moving to countries with more relaxed emission limits.
It was to address this that the EU suggested extending the carbon tax to cross-border trade because this would allow countries to maintain their competitive advantage.
According to the World Bank, the strength of a border tax on carbon is its potential ability to shift the burden to mitigate the damage caused by climate change to market players who are truly responsible. It would encourage producers to adopt clean technologies and market innovation.
The carbon tax can also help deal with the complications created by the difference between emissions produced and consumed in an interconnected global economy, said Aman Srivastava, a member of the Center for Political Research. The tax would indicate the exact source of the emissions and reduce the cases of exported emissions.
The Cons of a Carbon Border Tax
The carbon border tax expects developing countries to adhere to environmental standards set by developed countries, and this violates the “common but differentiated responsibility” (CBDR) principle of the Paris Agreement, he said. UNCTAD report of October 2021. The principle recognizes and compensates for the fact that rich nations have historically emitted much more carbon than poorer nations, which also suffer much more from the impacts of climate crises.
For developing countries, a carbon trade tax has several drawbacks, as we said earlier. According to the UNCTAD report of July 2021, in countries whose economic structures depend on energy-intensive activities, such as the main exporters of steel and cement, competitive disadvantages in international markets could lead to the loss of jobs. The report examines the implications of the carbon tax on the European border in developing countries.
“With carbon tax at the EU’s border, countries, including developing countries, are subject to emissions taxes that do not even contribute to their own domestic consumption. It adds an element of injustice to more of trade and other climate equity concerns, “Srivastava told CPR.
There are no established protocols on what a carbon tax would look like at the border, but they should take into account 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 fail to meet their financial commitments,” said Ashish Fernandes, executive director of Climate Risk Horizons, a Bengaluru based company. organization working on the impact of the climate crisis on financial systems. “A border carbon tax that harms exports and employment in developing countries would be rubbing salt into the wound.”
As we reported in October 2009, developed countries had pledged to provide developing countries with an annual climate fund of $ 100 billion by 2020. But only about 65% of the 100,000 Millions of dollars pledged have been delivered by developed countries on average between 2013 and 2019. and most in the form of expensive loans.
Alternative approaches
The one-size-fits-all approach would not be effective on carbon tax, CPR Srivastava said, adding that countries have different capabilities to deal with competition.
The UNCTAD report of October 2021 also suggested a differentiated approach for developed and developing countries that would be more equitable. This requires developed countries to make clean technologies more accessible, by removing intellectual property rights or patents, for example, or to provide financial support to help poor countries cover the rising cost of procurement. 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 emission reduction targets for products imported from developing countries, from which they could provide access to financing.
New clean technologies such as cheaper solar panels, green hydrogen technology and ocean tidal energy extraction methods 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 unattainable for the poorest economies. For example, European companies such as ArcelorMittal and Thyssenkrupp are already developing hydrogen-based green steel, we reported in September 2021. But in India, the challenge is to make this transition economically competitive and commercially viable, we said. .
We contacted the Ministry of Trade and Commerce to receive their comments on the EU carbon tax on 3 November. We will update when we receive a response.
