EC proposed Carbon Border Adjustment mechanism: Key considerations for least developed countries

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Although most nations recognise the need to transition to a decarbonised world, carbon tax policies have usually encountered significant roadblocks, most notably from the gilets jaunes protests that swept through France in 2019.

This shows that despite the urgent need to transition to a net zero carbon world; climate financing policies particularly the ‘Carbon Border Adjustment’ mechanism must allow for a broad consultation and engagement with people whose livelihoods would be significantly impacted by the policy.

What is the proposed Carbon Border Adjustment (CBA) mechanism by the European Commission (EC)?

The CBA is an import tax on non-EU countries designed to ensure that European companies do not have competitive disadvantages compared to companies from countries with lax climate regulations, and to reduce the risk of carbon leakage. In her mission letter to Commissioner for the Economy Paolo Gentiloni, EC President Ursula von der Leyen also noted that another objective of the CBA is to allow the EU reduce greenhouse gases (GHGs) released into the Earth’s atmosphere, whilst ensuring that domestic efforts do not simply serve to drive production and GHGs emissions elsewhere.

While the core objective of the CBA will ultimately help countries transition to a decarbonised world, there are certain socio-economic risks and social justice questions pertaining to least developed countries (LDCs) that must be addressed.

It is in the interest of the EC that the CBA does not result in lower exports to the EU from LDCs. That would have a potentially negative impact on climate-vulnerable low-income countries which are already debt distressed as result of COVID-19, and will likely need years to recover from the pandemic.

The following consideration would help the EC introduce a CBA policy that is equitable, fair and progressive.

Commitments to the Paris Agreement

The commitment by developed countries to jointly mobilise $100 billion in climate finance by 2020 to support developing countries is at the heart of the Paris Agreement. The EC, in their design of the CBA should demonstrate regard for international commitments in the area of climate action and finance, taking into account that the accord recognises that countries have differentiated responsibilities.

Developing countries have so far lamented that developed countries are not living up to the agreements reached at COP16 in Cancún, and the formalised goal of mobilising jointly USD 100 billion per year by 2020. The Independent Expert Group on Climate Finance has also noted in their 2020 report that the $100 billion target by 2020 has not been reached.

In 2020, Oxfam Climate Finance report noted that the terms on which developed countries are currently meeting the $100bn goal are highly questionable insisting that LDCs and Small Island Developing States (SIDS) are receiving too little of the finance provided.

“Too much is being provided in the form of loans and other non-grant instruments, including to LDCs and SIDS. The world’s poorest countries and communities should not be forced to take out loans to protect themselves from the excess carbon emissions of rich countries,” the report stated.

This, according to Oxfam is harming the economies of LDCs by contributing to rising – and in many countries, unsustainable – debt levels.

As at the last quarter of 2020, 54% of low-income countries were deemed to be in debt distress or at high risk of debt distress; a trend which has continued into 2021.

The European Commission should assess its international commitment to the Paris Accord and improve its share of climate finance to LDCs. Any burden imposed on trade in the form of the CBA which fails to account for the negligible contribution of LDCs to the climate crisis will further plunge these regions into poverty risking the collapse of many of such economies.

The world’s poorest countries should not have to forgo life-saving aid to pay the costs of a climate crisis not of their making.

Climate Debt

Historically, between the period of 1751 to 2019, the EU has contributed about 22% of the total CO2 emissions, trailing the United States which is responsible for 25% of historical emissions due largely to industrialisation and population growth.

The situation is entirely different in Sub-Saharan Africa which has contributed only 3 per cent to global emissions during the period although it remains the most vulnerable to climate change.

This means that the proposed CBA by the EC which seeks to prevent carbon leakage and protect EU based companies must also necessarily be economically just and should not disproportionately impact climate-vulnerable countries that have historically done less harm to the environment.

A CBA that fails to account for climate debt and its potential impact on LDCs could rob developing countries of finance for health, education and other critical development goals.

Preferential Market Access – the European Union “Everything But Arms” Initiative

In 2001, the Everything But Arms (EBA) initiative was introduced under the EU’s GSP scheme, granting LDCs duty- and quota-free access for almost all products. The Carbon Border Adjustment mechanism would apply to goods from all countries, even the Least Developed Countries that currently benefit from duty free entry in Europe under this same initiative.

A loss of access to EU’s preferential market by LDCs coupled with the constrained fiscal space as a result of COVID-19 could result in lower exports to the EU, with potential negative impacts on jobs if flanking measures as part of a just transition are not in place.

The Path Forward: CBA Exemption for LDCs

To design a carbon tax policy which will not have a disproportionate impact on people living in poverty, the EC could consider the following;

  • Granting a Carbon Border Adjustment exemption to countries administering equivalent carbon taxes.
  • LDCs whose national policies, practices or regulations have led to reduced GHG emissions aligning with the Paris accord goals should receive an exemption.
  • Exempting LDCs from a CBA or returning all proceeds from the CBA applied on imports from developing countries to those countries to meet their own budgetary constraints in meeting mitigation and adaptation targets.

Gideon Sarpong is a Policy Leader Fellow at the School of Transnational Governance, European University Institute, Florence, Italy. His research interests include climate finance, ocean climate policy and internet governance.