The EU’s Carbon Border Adjustment Mechanism: How to Make it Work for Developing Countries

The EU intends to introduce a carbon border adjustment mechanism (CBAM) by the end of 2021. While the exact design is not yet known, the CBAM would see a charge levied at the border, proportionate to the carbon emitted during the production of imported goods. From the EU’s perspective, a CBAM is necessary to ensure that its efforts to combat climate change are effective: that is, they do not result in carbon leakage, as energy-intensive industries relocate outside the EU’s regulatory jurisdiction and European production is outcompeted by cheaper, carbon- intensive imports.

However, the EU’s proposed CBAM risks unfairly penalising the exports of developing countries. While all countries should accept responsibility for tackling a shared global threat such as climate change, it is unreasonable to expect poorer countries to shoulder the same burden as those that are richer and have historically contributed a larger share of cumulative carbon emissions. This principle, termed ‘common but differentiated responsibilities and respective capabilities’, has guided the international climate negotiations so far. Under the Paris Agreement, for example, a country’s national circumstances can be taken into account when making its climate commitments. Furthermore, concerns about the CBAM’s impact on developing countries have already been raised in the WTO’s market access committee – with a particular focus on the EU’s public framing of its CBAM as a revenue raising tool, and a contributor towards the EU’s ‘own resources’ (as the EU institutions’ revenues are called), rather than as a means of addressing climate change.

The EU’s CBAM must be designed with developing countries in mind. Goods imported into the EU from the 46 least developed countries (LDCs), as defined by the UN, should be exempt from any CBAM levy. Such an approach would complement the EU’s existing unilateral preference scheme for LDCs, which offers duty and quota-free access to all goods imported from LDCs other than weapons – the ‘Everything But Arms’ (EBA) scheme. Excluding LDCs from the CBAM should not prove controversial with member-states, and is consistent with existing EU approaches to trade, as well as the EU’s broader development objectives.

For lower-middle-income countries such as India, Indonesia and Nigeria, which are much bigger contributors to global carbon emissions, the EU faces a tougher decision. Here the EU should build its approach on its existing unilateral preference schemes covering select lower-middle income countries: the standard Generalised Scheme of Preferences (GSP), which fully
or partially removes tariffs on two-thirds of tariff lines; and GSP+, which offers additional trade benefits to economically vulnerable countries if they implement 27 international conventions relating to the environment, human rights, labour rights and good governance. In line with existing GSP and GSP+ conditions, imported goods could be exempted from the EU’s CBAM only until they account for a significant share of the EU’s total imports. This would avoid penalising nascent industries in lower- middle-income countries, while ensuring that sectors that are already internationally competitive are treated as such.

The exemptions proposed in this paper should not compromise the CBAM’s raison d’être. Emissions from developing countries account for a small proportion of the CO2 embodied in final EU demand. As such, exempting their exporters from the CBAM would not undermine the EU’s attempts to prevent carbon leakage. Equally, even with exemptions, developing countries will still have incentives to transition away from polluting energy sources and processes. As countries and industries develop, they will graduate from exemptions. They would then have two options to remain exempt from the CBAM: either governments could put in place their own internal carbon pricing scheme, equivalent to the EU’s; or industries could use more carbon-efficient means of production than for equivalent goods made in the EU.

To read the original policy brief from the Centre for European Reform, please click here