Why EU’s carbon levy helps rich countries get richer

Source– The post is based on the article “Why EU’s carbon levy helps rich countries get richer” published in “The Indian Express” on 22nd June 2023.

Syllabus: GS3- Environment

Relevance- Issues related to climate change

News– EU has introduced a Carbon Border Adjustment Mechanism (CBAM).

What is the issue of differentiated responsibility sharing in climate change negotiations?

Historically, the primary responsibility for climate change has been with the advanced economies, and their process of industrialisation.

The contribution of the Global South was negligible. The Kyoto Protocol recognised the “common but differentiated responsibilities”.

The Paris Agreement required the richer countries to make financial transfers to the developing economies. It set a floor of $100 billion per year for these transfers.

What are some facts about CBAM?

This involves imposing tariffs on imports from other countries that use carbon-intensive methods of production.

A tariff on the import of these goods by the EU would restore competitive parity to the domestically produced goods that are subject to a higher price of carbon.

The CBAM is expected to achieve three objectives. First is to reduce the EU’s emissions. Second is that the EU should not lose competitiveness in carbon-intensive goods. Third is to make the targeted countries reduce the carbon intensity of their exports.

This mechanism, starting in 2026, will cover products such as cement, steel, aluminium, oil refinery, paper, glass, chemicals and electricity generation.

The countries most affected will be Russia, Ukraine, Turkey, India and China. Only three of the 12 exporters to the EU have a mechanism for “pricing carbon”.

What are issues related to CBAM?

Need for more details– First, is related to countries that will be exempted.

Second is related to emissions that will be included in the levying of the import tax. Are indirect emissions embodied in inputs like machines to be considered or only direct emissions?

Third is related to products that are to be included in CBAM.

International laws– The WTO has promoted free trade. The CBAM is a unilateral move, against the spirit of multilateralism.

The problems of measurement mean that it could be used for protectionism. It targets production processes that the WTO does not approve of.

Revenue collection– The analytical framework for tackling climate change is based on putting a price on carbon emissions.

Burning of carbon anywhere in the world affects climate change across the world. So, there is a need for a global price for carbon to redress this global “externality”.

In the absence of a world government, who gets to keep the tax revenue is important. In the case of the CBA, it is the EU that will keep the revenue.

Concerns related to the global south– This mechanism also seeks to penalise “free riders”. A free rider is one who is not contributing towards fighting climate change, although has the means to do so. The country that fits this definition is the US.

The developing countries did not create the problem and have limited means to pay for a “clean up”.

There are equity concerns also. It’s designed to help rich countries avoid paying for creating the climate problem.

Other issues– There is some arbitrariness involved in the coverage of a CBAM. It is not always easy to infer the process of production by looking at the final product.

CBAM is targeting the emissions embodied in a limited number of traded goods. Its effect on climate change is likely to be small.