Making trade work for climate

Source: Business standard

Relevance: On Carbon border tax and its impact

Synopsis: An analysis of the complexities involved in dealing with climate change via measures like carbon border tax.

Context

The European Union’s (EU’s) plan for a carbon border tax (CBT) —that is, duty on imported goods like aluminium, steel, cement, and electricity from countries with less stringent greenhouse gas is gaining both support and criticism. The global trade is critically linked to GHG (greenhouse gas) emissions, thus EU’s move is expected to pressure other countries to impose similar taxation and thereby reduce emissions.

Trends

Past : In the early 1990s, when world leaders came together to discuss and sign the Framework Convention on Climate Change, they recognized that the emissions would increase the warming of the planet and produce catastrophic weather changes that knew no borders.

• Signing of free trade agreements: Despite the well known fact of eventual warming of the planet, the developed world was busy signing free-trade agreements. The reason for this furious activity was that the already rich world was finding the cost of production too high there. They wanted to reduce their cost of production to enable consumption and economic growth.

Present day: However, today, China is the biggest exporter; it has overtaken all other countries, including the US. China is also the world’s biggest GHG emitter, followed by USA

Real problem

The real problem is that rich countries did not reduce their emissions. So even as manufacturing moved to “other” countries, their emissions, driven by the consumption of goods and electricity, continued to rise.

At the same time, the emerging world — China, India, Brazil, Indonesia, Vietnam, and all the “other” world exporters — saw their emissions rise. This is why we are in a extremely difficult situation wrt climate change.

Problems with CBAM

Carbon border tax has many issues associated with it.

• A protectionist measure promoting domestic industries
• Increase distrust: It will only add to the distrust between the developed and the developing countries.
• Will further inequity –  The border tax will add to the revenue of the EU while it will impact the revenue’s of exporting country. For instance,the UN Conference on Trade and Development (UNCTAD) estimates that at $44 per tonne, the carbon border adjustment mechanism (CBAM) income will rise by $2.5 billion in the EU and fall by $5.9 billion for the exporting countries

Conclusion

The world cannot ignore the question of global trade and consumption anymore.  It needs a carbon tax to disincentivize consumption and to make production systems climate-friendly. But the monies collected from this tax, including the EU carbon border tax, should be spent in countries worst impacted by climate change.

Terms to know

• CBAM
• EU
• UNFCCC