{"id":3994,"date":"2024-09-02T11:09:33","date_gmt":"2024-09-02T09:09:33","guid":{"rendered":"https:\/\/www.rivistaeco.com\/?p=3994"},"modified":"2024-09-02T11:09:33","modified_gmt":"2024-09-02T09:09:33","slug":"a-mechanism-to-stop-carbon-leakage","status":"publish","type":"post","link":"https:\/\/www.rivistaeco.com\/en\/2024\/09\/02\/a-mechanism-to-stop-carbon-leakage\/","title":{"rendered":"A Mechanism to Stop Carbon Leakage"},"content":{"rendered":"

From the perspective of combating climate change, reducing CO2 emissions in one country makes no sense if they increase elsewhere. There’s also the risk of damaging the competitiveness of businesses located where regulations are stricter. This is a problem the EU seeks to address with a tariff on imports of high-carbon-content goods.<\/span><\/i><\/p>\n

The reduction of greenhouse gas emissions is a global challenge that requires shared solutions at the international level. However, countries do not have a common approach to the problem and follow different paths, adopting climate policies that increasingly diverge. For instance, the European Union aims to extend and strengthen the CO2 market (European Union Emission Trading System, EU ETS), the main emission reduction policy at the European level. Meanwhile, China and the United States have adopted a different approach: both have introduced industrial policies that include various incentives and subsidies aimed at enhancing green technologies for “clean” production processes. Other countries adopt mixed approaches that better suit their specific characteristics, such as available fiscal capacity to finance industrial measures and the social and political acceptability of imposing a price on CO2.<\/span><\/p>\n

Climate Policies, Economic Development and Competitiveness<\/b><\/h3>\n

Developing countries justify the slow and cautious introduction of climate policies with historical reasons (for example, a significantly lower contribution to global emissions if the reference period starts from the Industrial Revolution) and the need not to slow their economic development and consequently the reduction of poverty. In short, they appeal to the principle of common but differentiated responsibilities and respective capabilities as enshrined in the UN Framework Convention on Climate Change (UNFCCC).<\/span><\/p>\n

The growing differences in the strategies adopted by various countries complicate international coordination, slowing the fight against climate change. Accelerating climate policies in a single country could impose costly restructuring of production processes, leading to the relocation of the most polluting productions to countries with less stringent environmental requirements. This would reduce or nullify the effectiveness of emission reduction efforts.<\/span><\/p>\n

Most empirical studies show that so far this risk has been almost non-existent, but it may manifest in the future. If climate goals require much stricter and more ambitious policies, progress is hindered by the fear of relocations and the lack of international coordination. Thus, global emissions continue to rise instead of falling.<\/span><\/p>\n

CBAM: The European Solution<\/b><\/h3>\n

In an attempt to unlock the situation, the European Union has introduced the Carbon Border Adjustment Mechanism (CBAM). This mechanism aims to equalise the price of emissions “contained” in imported goods with that borne by European producers. Importers of high-CO2-content goods will have to declare how much was emitted along the entire production chain and pay a proportional entry duty. They can choose to adopt estimates from the European Commission or provide their own estimates verified by independent experts. CBAM provides a reduction in duty if CO2 emissions are taxed in the exporting country (the reduction will be proportional to the difference between the CO2 price in the EU and the exporting country).<\/span><\/p>\n

The stated goal of the mechanism is to strengthen the effectiveness of the CO2 market. To achieve this, it is necessary to reduce the negative effects of the measures on the competitiveness of European businesses. CBAM appears to be the right tool to achieve this goal. The CO2 duty will reinforce incentives to reduce emissions in the EU and in countries exporting goods to the EU. Companies producing in non-EU countries will have an incentive to adopt low-emission solutions to avoid paying hefty duties once they reach the border. Within the Union, stricter climate policies can be adopted without risking the relocation of productions and emissions, and exporting countries will be encouraged to introduce a price on emissions.<\/span><\/p>\n

CBAM will allow the current system based on the free distribution of emission permits to be surpassed. This system was also designed to solve competitiveness and carbon leakage problems but proved ineffective and costly. The CBAM adjustment mechanism will be fully operational from 2026, at the end of the transitional phase of experimentation and data collection that began in January 2024. The subject goods (cement, electricity, fertilisers, iron, steel, and aluminium) have a high CO2 content, and European consumption is largely covered by imports.<\/span><\/p>\n

A Criticised and Controversial Mechanism<\/b><\/h3>\n

The price on emissions is the cornerstone of the CBAM mechanism. This approach has caused discontent among countries that use other types of policies, such as subsidies for the development and use of clean technologies or other forms of regulation. Globally, most emissions are not subject to any tax (about three-quarters according to World Bank data), and where the tax exists, it is extremely low, on average less than half of that in Europe.<\/span><\/p>\n

Many developing countries consider CBAM contrary to the UNFCCC principle of common but differentiated responsibilities. They argue that by equating the price of emissions in developing countries to that of Europe, the mechanism does not take into account these countries’ limited capacities to cope with the resulting economic and social cost increases (due to low productivity, small size, low profitability of most businesses and high poverty rates). Some states accuse it of being essentially a protectionist policy rather than a climate policy aimed at defending production and jobs in EU countries.<\/span><\/p>\n

Moreover, CBAM requires significant efforts to collect and verify emission data for each product. For over twenty years, EU states have developed a common data collection system to comply with ETS (Emissions Trading System) obligations, but many countries (including some developed ones) lack such a system. However, the European Commission has already planned assistance for developing countries to start data collection and verification systems.<\/span><\/p>\n

Will It Succeed or Fail?<\/b><\/h3>\n

Under what conditions can CBAM contribute to the reduction of greenhouse gas emissions globally? One condition is the massive reduction of the carbon content of CBAM-covered production activities (in other words, the reduction of emissions per unit of product). Moreover, the decrease should more than offset the increase in emissions from these activities due to economic growth, especially in developing countries. On this point, emerging countries, and not only them, are categorical: they do not intend to sacrifice their economic growth and future prosperity to solve the climate change problem caused mainly by developed countries’ emissions in past decades. In short, economic degrowth is not an option.<\/span><\/p>\n

Thus, CBAM’s ability to foster decarbonisation not only in European countries but also in non-EU countries becomes crucial. Here we can imagine two scenarios: one negative and one positive.<\/span><\/p>\n

In the negative scenario, CBAM comes fully into force, the emission price in the EU increases, European companies reduce their emissions, but they continue to grow in non-EU countries due to low or non-existent carbon taxes and other ineffective climate policies. This scenario could occur if non-EU countries reorient their exports from the EU to other markets. In this case, CBAM would have the same effect as any other customs duty, and the carbon intensity of productions in non-EU countries covered by the mechanism would not decrease or only decrease to a limited extent. CBAM would thus fail in its goal of contributing to reducing global emissions and halting climate change while imposing significant costs on EU businesses.<\/span><\/p>\n

In the positive scenario, CBAM achieves its objectives by inducing a drastic reduction in carbon intensity in both EU and non-EU countries. To achieve this result, the EU should continue to promote multilateral solutions to enable partner countries to meet CBAM’s administrative requirements, for example, through technical assistance in creating IT infrastructures for emission data collection and verification. Together with other countries, the EU should then commit to promoting and further accelerating the use of clean energy sources and technologies in developing countries with high growth potential through climate finance, the activity of multilateral development banks, and bilateral agreements. Progress in this area can lead to a reduction in the carbon intensity of productions in developing countries, a decrease in their emissions, and thus a reduction in the amount of duties CBAM imposes on exports to the EU, avoiding their diversion to other non-EU countries. Dialogue with the United States and China on technology transfer and the promotion of international trade in low-carbon products would help avoid further tariff increases that slow and make mitigation more costly. In short, preserving and strengthening international trade relations is the key for CBAM to succeed in contributing to the decarbonisation of production processes and the reduction of global emissions.<\/span><\/p>\n

Bio<\/em><\/strong><\/p>\n

Mauro Pisu<\/strong> is a Senior Economist at the OECD’s Economics Department, coordinating work on climate change. At the OECD, he has worked for various country desks (Brazil, Indonesia, Costa Rica, Italy, Greece), also dealing with infrastructure and digitalisation.<\/span><\/em><\/p>\n

Filippo Maria D\u2019Arcangelo<\/strong> is an Economist at the OECD in the \u201cGreen Growth and Resource Allocation\u201d workstream of the Economics Department. His recent work focuses on mitigation policies, carbon pricing, and carbon markets.<\/span><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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