The European Union (EU) is planning to tax carbon-intensive products as a strategy to decrease global emissions and avoid carbon leakage. But will exporters be able to adapt? Lilia Maximova, Gabriela F. Kilpp, Natalia Koto, and Bárbara Martins take a look.
The European Union idea to tax carbon intense products could harm developing countries. (Public Domain)
The EU is debating implementing a carbon price for imports. Such Border Carbon Adjustments (BCAs) are fiscal instruments that can target carbon leakage (when companies transfer production to countries that are less strict). But what does it actually mean in practice? Will companies and countries be able to adapt? This article looks at how different BCA designs – taxing all imports, or taxing only Emissions-Intensive Trade-Exposed (EITE) imports – could impact developing countries that export to the EU.
What an EU BCA could mean for developing countries
Guatemala, Morocco, Vietnam and Mozambique represent lower middle- and low-income countries in Latin America, Africa and developing Asia. In the following sections, we explore how a BCA could impact them. The countries differ in their levels of fossil fuel intensity, statistical capacity, the importance of trade with the EU, and the share of EITE sector exports such as steel, aluminum and cement.
Trade with the EU is very important for Mozambique: exports to the EU make up 10.5% of the GDP, most of which is from EITE products (around 8.5% of GDP). Mozambique also has a low carbon intensity rate of industrial consumption (13.4 gCO2/MJ, 3 times lower than that of the EU) and most of its electricity is from renewable sources (86%), although this is largely from hydropower. Because its carbon intensity is low compared to the EU, its products would not be subject to a BCA, and the country would even gain competitive advantage over other exporters and possibly be able to increase its production. However, it would be necessary to enhance its statistical capacity which is currently rated as relatively low by the World Bank in order to be able to prove for importers that its products have in fact a low carbon footprint. Moreover, Mozambique has important related issues that could be addressed simultaneously: access to electrification is still low (by 57% in urban areas and only 13% in the countryside) and only 6% of the population has access to clean cooking.
If the EU’s BCA were to apply to all imports, Vietnam’s economy would see major impacts, due to the large share of the EU in the exports (13.4% of the GDP) and the high carbon intensity of its industrial consumption (43.5 gCO2/MJ, almost 20% higher than the EU). Transitioning to clean energy would lower this carbon footprint. Currently the national renewable electricity output is 37%, but there is a high potential for solar and wind energy. Meanwhile, if the EU decides to tax only carbon-intensive products Vietnam would not be as heavily affected, since EITE exports to the EU represent only 0.55% of the GDP. Moreover, the relatively high statistical capacity of Vietnam by 83.3 would be an advantage if the BCA is implemented.
Morocco is an important trade partner of the EU and applying either BCA policy could hinder the ongoing negotiations to establish a Deep and Comprehensive Free Trade Area (DCFTA) between the EU and Morocco. An immediate introduction of a BCA could hurt the Moroccan economy, though to a significantly greater extent if it is imposed on all products: exports to the EU make up 17% of Morocco’s GDP, but EITE exports to the EU constitute a negligible 0.17% of the GDP. In either scenario, products would likely be subject to a BCA due to the carbon intensity of Morocco’s electricity sector (67% of the country’s total GHG emissions). However, there are significant incentives for Morocco to decarbonize its energy sector: a higher share of renewables would increase its energy security, while reducing carbon intensity of its economy. As a net energy importer, Morocco demonstrates a significant political will for reforming its fiscal system, energy sector, and industrial structure, which, however, requires further investments beyond mitigation finance and technical support to Environmental Fiscal Reform (EFR).
The EU is Guatemala’s third most important trade partner, and exports to the EU correspond to 1.2% of the country’s GDP. Coffee and bananas are the most important exports, while EITE exports to the EU have a low share in the GDP of 0.09%. However, because Guatemala’s production is highly carbon intensive (by 56.3 gCo2/MJ, 50% higher than the EU’s rate), any exports to the EU would probably be subject to BCA taxation. This could increase the prices of Guatemala’s agro products in Europe and be burdensome to Guatemala’s economy and European consumers. However, if Guatemala has time to adapt, it could manage to decarbonize its energy mix and lower its carbon footprint: the country has committed to reducing CO2 emissions by 11-22% compared to projected emissions in a business as usual scenario until 2030, and could further decarbonize its energy system which is already at 60.4% renewable electricity (although much of this is from biofuels). Additionally, renewable energy could help in expanding access to electricity and to clean cooking which remain challenges in the country.
What’s next: supporting countries and accellerating the energy transition
Implementing BCAs for all imports to the EU could expose trading partners to economic risks and strain development – especially for countries like Vietnam with a high carbon footprint and a large share of its GDP from exports to the EU. While countries with lower carbon intensity like Mozambique might not be subject to a BCA, they would still need to prove carbon content of products, a significant administrative burden. The impact of a BCA varies significantly depending on whether it is implemented for all products or only over EITE sectors. Morocco, for instance, would also be less impacted by an EITE tax and would therefore have more time to decarbonize its energy sector and lower its overall risk.
Transitioning to clean energy would allow countries to at once lessen their exposure to a BCA (through lowering the carbon content of production) and addressing issues commonly faced by developing countries such as clean energy access. Gradual implementation of an EU BCA while facilitating technology transfer and contributing to technical capacity building could be a good way to address justice aspects of emission reduction measures imposed on countries with historically low emissions, as well as increase their long-term resilience.
The authors, Lilia Maximova, Gabriela F. Kilpp, Natalia Koto, and Bárbara Martins, are MA students at the Willy Brandt School of Public Policy. This work is the outcome of a course led by the ISIGET team at the IASS Potsdam; trade and carbon intensity data were compiled by the IASS team from World Bank, UN and IEA sources as part of ongoing research on border carbon adjustment.
Lilia’s academic background is in African Studies and International Relations. She is passionate about the topics of energy transition, natural resource justice, and participatory natural resource management.
Bárbara is a lawyer with expertise in Public Law and is interested in energy transition in the Global South.
Gabriela’s academic background is in International Relations, and is interested in the topics of global energy transition and global climate governance.
Natália is a social worker with a postgraduate degree in Social Projects and Public Policy; she first learned about the energy transition at the WBS, and is now very keen on the topic.