European Union’s Carbon Border Adjustment Mechanism puts a disproportionate burden of decarbonisation on developing countries: CSE

• Centre for Science and Environment (CSE) releases comprehensive assessment report of CBAM (abbreviated name for the EU Mechanism) – says it raises costs and hurts trade competitiveness in the Global South, violates CBDR 
• “Global trade rules need to be overhauled for a climate-risked world, but not at the cost of climate justice”: Sunita Narain 
• “Tools like carbon border taxes imposed by rich countries will further take away the ability of developing countries to finance decarbonisation”: CSE  

Download CSE’s report on CBAM click here: 

Access the proceedings of the CSE webinar on CBAM here 

New Delhi (India), July 18, 2024: Policies such as the European Union’s (EU’s) Carbon Border Adjustment Mechanism (CBAM) place the burden of decarbonising heavy industrial sectors on the Global South, and act as roadblocks in the path of development, said experts speaking at a webinar organised by Centre for Science and Environment (CSE), the New Delhi-based think tank. 

CBAM, announced in 2022 by the EU, places a tax on imported goods such as iron and steel, cement, aluminium, fertilisers, electricity and hydrogen, based on the GHG emissions intensity of production of these goods.  

At the webinar, CSE released a new report explaining the implications of the CBAM mechanism (see link given above). Inaugurating the webinar, CSE director general Sunita Narain said: “Trade and climate are becoming intrinsically linked, and global trade rules need to be overhauled for a climate-risked world, but not at the cost of climate justice. Measures like CBAM are unilateral measures and shift the burden of the transition to the developing world. This, when developed countries themselves have not reduced their emissions sufficiently and continue to occupy carbon space. What is of particular concern is that such measures may further hurt economies of countries of the South, restricting their abilities to decarbonise.” 

CBAM is aimed at cushioning the EU’s firms from competitors who can manufacture more cheaply in countries that do not subject them to a carbon price. The EU also believes that the tax would incentivise its trading partners to decarbonise their manufacturing industries.  

Panellists at the webinar included -- besides Narain – Claudia Contreras, Economic Affairs Officer at UNCTAD (UN Trade and Development); Faten Aggad, Executive Director, African Future Policies Hub (AFPH); Avantika Goswami, Programme Manager, Climate Change, CSE; and Trishant Dev, Programme Officer, Climate Change, CSE. 

Presenting the CSE report, Goswami said: “Developed countries historically relied on fossil fuels for their economic growth. Today, despite having the capacity to significantly reduce domestic emissions and possessing technologies for low-carbon manufacturing, they continue emitting. They have also outsourced high-emission production to developing countries. Meanwhile, developing nations are unjustly penalised by a CBAM, which fails to account for the historical factors shaping their current reality.”  

“It also disregards the prior failure of wealthy countries to make good on their promises to ensure that green technologies are more accessible to developing countries, whether through extending knowledge or providing financing. They are also expected to bear the cost of their decarbonisation to avoid the CBAM. This, when Paris Agreement emphasises the need for the developed world to extend financial and technological support to the developing world, aiding them in their mitigation efforts. Thus, the CBAM is a clear violation of the principle of common but differentiated responsibilities (CBDR) enshrined in the Paris Agreement and the UNFCCC,” added Goswami.  

UNCTAD’s Claudia Contreras said: “All such policies (such as CBAM) appearing everywhere should be designed and developed in alignment with the Paris Agreement, taking into consideration the fact whether other countries have the capacity to comply. Trade is an important source of revenue for some countries, and the negative impact of these policies may leave them with even fewer resources to fund their decarbonisation efforts. Therefore, it is important that countries implementing these measures support those that are affected.” 

Faten Aggad of AFPH said: “Our findings show that the economic impact on Africa would result in a US $25 billion loss per year. To put it in perspective, the entire continent receives just under US $30 billion per annum in climate finance, which is far below what is required for a solid response to the climate challenge, Essentially, we are losing US $25 billion that isn’t being compensated. Of course, there is the issue of justice and burden-shifting. Despite Africa’s historical contribution being under 4 per cent of global GHG emissions, CBAM comes across as an attempt by the EU to shift the burden of decarbonisation to other countries without providing the necessary financial or large-scale technical support, such as accounting systems.” 

What does CBAM mean for India

For India, CBAM-covered goods exports to the EU comprised almost 10 per cent of its total goods exports to the EU in the year 2022-23. Says Trishant Dev: “Our estimate suggests that at a rate of €100 (or US $106) per tonne of carbon dioxide equivalent, CBAM would impose an average tax burden of 25 per cent annually over and above the value of CBAM-covered goods exported to the EU by India. This is a cost that we should not have to bear.” 

The way ahead

The CSE report recommends the following:

• The EU should set aside revenue from CBAM to aid the decarbonisation of manufacturing in developing countries as a necessary step. Shifting to low-carbon processes demands substantial financial resources and technological advancements – which many developing countries currently lack. Moreover, it must increase overall flows of climate finance towards developing countries, and exempt the most vulnerable countries from bearing any tax burden. 

• Developing countries can proactively take steps to mitigate CBAM’s liability, while also transforming their manufacturing sectors to shift towards low-carbon processes.
  • In line with their demand for financing, developing countries must have sectoral mitigation plans in place outlining specific measures and targets for emissions reductions in key emitting sectors of their economies. Says Trishant Dev of CSE: “This is essential to align their domestic strategies with their unique needs and avoid the impact of top-down prescriptions from the international community which may fund solutions not appropriate for them. By aligning climate finance with these sectoral mitigation plans, the EU could be assured that its support is targeted and impactful, maximising the effectiveness of its financing for decarbonisation efforts.”
  • To mitigate the impacts of paying the tax to the EU (or any country imposing such a mechanism), developing countries may consider taxing their goods domestically at the point of exports, and cycling the funds into a government-managed decarbonisation fund. This fund can then be utilized by industries to shift to low-carbon production processes and reduce their greenhouse gas (GHG) intensity. This approach satisfies the EU’s requirement for the existence of a domestic carbon pricing mechanism, in this case, a carbon tax, and does not disrupt fair trade conditions with the EU. Moreover, it retains the funds within the developing country.
  • As an interim measure, developing countries may consider diversified production processes for different markets and trade partners. Allocating green production processes to goods destined for regions imposing a CBAM could be an interim step while the country’s manufacturing sector gradually decarbonises. Says Goswami: “This would mean reserving less carbon-intensive production for markets that prioritise environmental considerations over price. Industries can thus achieve multiple objectives: engineering industrial outputs to minimise the costs of CBAM-like measures and buying time to decarbonise overall at a fairer pace.”
  • If climate policies are to permeate trade agreements, climate justice must be at the core of this development. This requires us to consider the burden-sharing aspect of climate policy in trade as well. In this light, we propose a system where developing countries could impose a 'historical polluter tax' on trade partners to fund their own decarbonization efforts. This tax could be imposed on trade partners responsible for a certain share of cumulative historical CO2 emissions since the pre-industrial period.  

CBAM is one among several policy tools that have been initiated in this decade, that appear to further the cause of climate protection, but carry with them telltale signs of trade protectionism and economic nationalism, points out Goswami. Many of these policies have been driven by developed nations in response to the perceived threats of de-industrialisation, and carbon leakage due to relatively stricter domestic climate policies in their jurisdictions as compared with some developing countries. 

Says Dev: “The impacts of policies like CBAM must be minimised so that the developmental process in the Global South is not hindered, and can be achieved through low-carbon, climate-resilient pathways with adequate financing and technology support from developed countries.” 

For more information, interviews etc, please contact Sukanya Nair of The CSE Media Resource Centre, 8816818864, sukanya.nair@cseindia.org