The BRICS countries – Brazil, China, Russia and South Africa – have recently joined India in its opposition to the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) proposal, calling it discriminatory. Adopted by the European Commission on July 14, 2021, and aiming to come into effect by 2026, the legislation plans to impose border taxation on the import of certain carbon intensive goods (cement, electricity, iron, steel etc.), which may in the future be extended towards other goods. However, with the BRICS’ and other developing countries’ opposition, the question remains whether the EU can present its taxation policy in an equitable and acceptable manner to the Global South. In what follows we shall assess the goals and rationale behind CBAM, as well as the potential difficulties the EU might face in promoting it to its external trade partners, mitigating responses by the Global South, often dependent on carbon-intensive industries.
Through its Emissions Trading System (ETS) and CBAM, the EU aims to reduce the consumption and import of Greenhouse Gas (GHG) emitting resources. As stipulated in the European Green Deal, the EU is working towards a 55% reduction in carbon emissions by 2030 (compared to 1990 levels) and net-zero emissions by 2050. It plans to increase its focus on renewable energy, thereby decreasing its dependence on coal and natural gas by 2030, before gradually reducing the use of oil and other such emissions-intensive products by 2050. To mitigate the increased risk of ‘carbon leakage’ (i.e., the relocation by businesses from countries that have enacted measures to reduce carbon emissions to other countries with looser standards), it aims to create a level playing field for EU producers active in affected sectors under CBAM, by putting a carbon price on imports of such products from outside the EU, with domestic (EU) industries expected to lobby for continued free allocation of carbon certificates for use or sale.
While ambitious, this policy is imperative given the EU’s position as one of the world’s largest importers and exporters of goods and commodities. However, there lie numerous challenges ahead in pushing the policy forward.
A first challenge the EU is likely to face is an ever more prevalent post-colonial nationalism in the Global South, like in the BRICS countries and among ASEAN states, of which many are major exporters with large industrial bases. Previously subjected to colonialism, these states have often proclaimed their ‘right to development’, the chance to improve their societies’ technological levels. The EU needs to ensure its policy to be in line with the Paris Agreement, and especially the principles of equity listed under Article 2 – that of “common but differentiated responsibilities” that each country has, to reduce the impact of climate change. Moreover, it must avoid accusations of economic imperialism, as this policy would involve a greater risk to lower income societies and communities (that spend a higher proportion of their salaries on items such as petrol) than higher income ones. In 2019, for example, the wealthiest 20% U.S. households spent just 2% of their after-tax income on gasoline. Meanwhile, the percentage for the lowest quintile was 8%, four times as high.
Secondly, as many carbon-intensive industries are set up, cater to, and are funded by western states or through international organisations such as the World Bank, CBAM could be seen as pushing the cost of pollution onto the Global South instead. Worse, without a buy-in from third world states, this policy risks to be seen as a climate-based sanctions regime meant to penalise non-EU industry, while increasing competitiveness for domestic industries, and profiting off the sales of carbon certificates. This runs another risk, that of being against WTO rules. It can be considered to go against the precedent set in the dispute between the USA and India (DS456 — Certain Measures Relating to Solar Cells and Solar Modules), the result of which was that under the 1994 General Agreement on Tariffs and Trade (GATT) and the WTO Agreement on Trade-Related Investment Measures (TRIMs), the non-domestic industry cannot be treated as less favourable than the domestic industry, which is what affected manufacturing states can claim the CBAM to be violating. For example, China issued a statement concerning a possible challenge to CBAM at the WTO on July 26, 2021. Manufacturing states such as China or Indonesia, having had the benefits of, for example, cheaper labour, can rightly fear that this policy may remove some of the competitive advantage they have enjoyed so far, which would be to the detriment of their economies and future development.
Finally, there remains the danger of ‘resource shuffling’ by importers into the EU. ‘Resource shuffling’ refers to any plan or scheme undertaken by a primary supplier of electricity to substitute electricity obtained from sources with lower emissions (such as renewables) to those with higher emissions (such as coal-fired power plants) to meet emission compliance obligations. This would not result in any net emission difference but would still meet taxation criteria under CBAM. Estimates from California- where the problem was first observed – show that there is a shuffling rate of 10%-30% of the electricity provided. Alternatively, corporations may send cleaner products towards the EU and send the rest of their production to countries with laxer carbon laws, which would not help alleviate net emissions.
There is a glaring need to promote a more equitable system that is compliant to WTO rules, as well as the Paris Agreement, and can incentivise countries to invest in similar systems. The example of the Chinese ETS is especially important in this, as it shows that even major manufacturing states are not opposed to the policy in principle, but rather to its proposed implementation. China, which plans to peak emissions by 2030, and be carbon-neutral by 2060, has initiated a program that incentivizes improvements in emissions intensity, as opposed to a flat reduction. This would allow the country’s growth to continue while aiming for emissions reduction down the line.
As a result, if the EU wishes to put into effect its CBAM policy, it will also need to provide the push required for other countries to adopt emissions-efficient production. In its 2020 budget, the EU committed 1074.3 billion EUR to its Multiannual Financial Framework (MFF) for the period 2021-2027. Additionally, the EU also established the Next Generation EU (NGEU) fund for post-Covid recovery, committing around 750 billion EUR of resources. The EU has pledged to devote 30 percent of MFF spending and 37 percent of NGEU spending to climate action. This entails that between 2021 and 2027 around 600 billion EUR worth of EU resources will be made available for green transitions.
A good starting point for the EU would be to provide additional funding to start-ups and small and medium enterprises (SMEs) supporting technological experimentation and innovation, under a policy like the 2017 EU-Algeria agreement under the European Neighbourhood Policy, where the EU committed 125 million EUR to bilateral assistance for the period 2018-2020, where part of the funding went to support for economic diversification and energy, environment and climate actions. Such an approach, entailing the provision of grants, loans and expertise for sustainable energy projects in partner countries, would help meet global climate objectives more efficiently, as countries in the EU neighbourhood and in the developing world have lower marginal emissions abatement costs than European countries. A transition away from carbon that would only focus on Europe would not do much to mitigate global warming, as Europe represents less than 10 percent of global GHG emissions.
There must also be an increased focus on alternatives such as electric vehicles, the production of which is not as clean as one would hope. In a study by Berylls Strategy Advisors, it was found that “the manufacture of an electric car battery weighing 500kg emits 74% more carbon dioxide than producing a conventional car in Germany”. Moreover, The Fraunhofer Institute for Systems and Innovation Research estimates that a mid-range electric vehicle with a 40 kilowatt-hour (kWh) battery bought in Germany in 2019 would need to drive 52,000km before its lifetime emissions fell below that of a comparative diesel/petrol vehicle. For luxury electric vehicles with large batteries (120kWh) that increases to 230,000km. As a result, there must also be investment into more efficient methods of production, even for alternatives such as electric vehicles, to ensure that the EU can meet its goal of net-zero emissions by 2050, as many electric vehicle batteries are produced in countries such as Thailand and China, which run on mostly non-renewable sources of electricity. In China, for example, coal accounted for 58% of total primary energy consumption, opening the door for enhanced cooperation between these countries and the EU.
To conclude, the opportunity cost for clean energy and lesser emissions cannot be seen as a disadvantage for the Global South and should not advantage developed markets benefiting from their transition away from the manufacturing sector. It runs the risk of, in a worst-case scenario, the creation of an economic and environmental ghetto for the Global South, while wealthier countries enjoy the benefits of free trade and cleaner energy. To get the Global South on board, the EU needs to engage with and encourage state expenditure on the part of non-European states as well as those dependent on exploitation of fossil fuel resources, and to provide the boost needed to kickstart a shift in the methods of production and resource exploitation in these states.
Written by Aadil Sud, EIAS Junior Researcher
Photo credits: Pixabay