Global South can minimise the CBAM impact. New report shows how.

A new report proposes a system where developing countries could impose a ‘historical polluter tax’ on trade partners to fund their own decarbonisation efforts

Unilateral policies like the Carbon Border Adjustment Mechanism (CBAM) are emerging and shifting the burden of the transition on the poor world as trade and climate change become more and more intertwined.

To quickly set the scene, CBAM levies taxes on imports of commodities such iron and steel, cement, aluminium, fertilisers, power, and hydrogen based on how much of these things are produced with greenhouse gas emissions.

Announced in 2022 by the European Union (EU), 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, a new report said.

The report by the Centre for Science and Environment (CSE) estimated that at a rate of €100 (or US $106) per tonne of carbon dioxide equivalent, CBAM would impose an average tax burden of 25% annually over and above the value of CBAM-covered goods exported to the EU by India. 

The report recommended ways in which Global South can respond to a changing trade regime in the era of climate change.

Recommendations for developing countries

The report shared recommendations on how 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, the report suggested. 

In order to lessen the effects of paying the tax to the EU (or any other nation enforcing a similar mechanism), developing nations should tax their exports domestically and reinvest the proceeds into a decarbonisation fund under government management, the report recommended.

This strategy does not interfere with fair trading conditions with the EU and satisfies the EU’s demand for the establishment of a domestic carbon pricing system, in this case, a carbon tax. Additionally, it keeps the money in the developing nation.

The report suggested that emerging nations take into consideration varied production techniques for various markets and trade partners as a stopgap strategy. Using green production methods for products going to areas with CBAMs may be a temporary measure while the nation’s manufacturing sector progressively becomes less carbon-intensive.  

The report said that if climate policies are to permeate trade agreements, climate justice must be at the core of this development. This requires considering the burden-sharing aspect of climate policy in trade as well. In this light, the report proposed a system where developing countries could impose a ‘historical polluter tax’ on trade partners to fund their own decarbonization efforts. Trade partners who have contributed a specific amount to the total historical CO2 emissions since the pre-industrial era may be subject to this tax.

Recommendations for the European Union

According to the report, 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. 

In addition, it will boost total climate funding flows to poor nations and exempt the most vulnerable from paying taxes, the report emphasised. 

Need to maintain equity and justice 

“Global trade rules need to be overhauled for a climate-risked world, but not at the cost of climate justice,” said Sunita Narain, director general, CSE. The report said that CBAM  raises costs and hurts trade competitiveness in the Global South, violating the principle of common but differentiated responsibilities (CBDR). 

According to Faten Aggad, executive director, African Future Policies Hub, the economic impact on Africa would result in a US $25 billion loss per year.  “To put it in perspective”, he said, “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 as Africa’s historical contribution stands under 4% of global GHG emissions”.

Because industrialised countries have relatively stronger domestic climate rules than certain developing countries, they have been driving many of these policies in reaction to perceived risks of de-industrialisation and carbon leakage.

The purpose of CBAM is to protect EU companies from rivals who can produce goods more affordably in nations that do not impose a carbon price. The report also stated that in order to avoid impeding the development process in the Global South, the effects of policies such as CBAM must be avoided. This may be done by implementing low-carbon, climate-resilient pathways with sufficient financial and technological support from wealthier nations. 

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