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Emerging economies take aim at EU external climate tariff CBAM

Africa / By

The prospect of the external carbon tariff or “carbon border adjustment mechanism.” (CBAM) which the European Union will be introducing in October is causing ever more debate. The measure is designed to prevent polluting companies from relocating to countries with less stringent environmental regulations, but opponents point at the disproportionate cost to emerging economies.

Le Monde explains how exporters in economically disadvantaged nations are deeply concerned regarding the impending changes. It notes how the new levy requires EU member states to disclose the carbon emissions associated with imported goods and purchase carbon credits to offset these emissions. Initially targeting sectors like steel, cement, and aluminum production, this measure aims to thwart the migration of polluting industries to regions with lax environmental regulations.

The objective of this tax is to prevent companies from seeking refuge in countries with lower environmental standards. However, according to a study conducted by London School of Economics professor David Luke, this carbon tax could potentially diminish African exports to Europe by 5.7% and reduce its GDP by 0.91%, amounting to $16 billion (approximately €14.6 billion).

The taxation of carbon emissions heralds a transformation in the global trade landscape, driven by the newfound advantage of low-emission production. In her 2021 study titled “Buy Green Not Local: How International Trade Can Help Save Our Planet,” University of Zurich professor Mathilde Le Moigne asserts that a uniform carbon tax worldwide would favor major producers in the global North, such as Germany, Japan, Finland, and the United States, which exhibit relatively lower carbon intensity. Conversely, it would disproportionately impact countries in the global South, including Cambodia, Peru, and the BRICS nations (Brazil, Russia, India, China, and South Africa), where the share of global emissions exceeds their production contribution.

Furthermore, opponents of the current approach to deliver positive outcomes for climate change have pointed out that an alternative approach lacking any punitive measures is possible, something which would spare developing countries from the economic damage caused by measures like CBAM.

Members of the “Climate & Freedom International Coalition“, an international network of thinkers and academics formulating such alternatives have in practice suggested that countries could instead replace the current “Paris Agreement” and promote an alternative international treaty whereby countries that ratify this treaty would then enjoy trade benefits, provided they adopt climate-friendly free-market policies.

Such policies could then include encouraging targeted tax cuts (“Clean Tax Cuts”), specifically in the four sectors that account for 80% of greenhouse gas emissions – transport, energy and electricity, industry and real estate – and tax cuts aimed at demonopolisation. That would also entail scrapping profit taxes for investors that purchase companies with a monopoly and state-owned enterprises, all with the aim of encouraging energy market liberalisation among treaty parties.

Another suggestion to encourage entrepreneurs and financiers in the states that signed the treaty through tax-exempt “CoVictory bonds” to make investments in “Property, plant, and equipment (PP&E)”. These are assets that are important to companies in the long term. The goal here is to lower the cost of borrowing by at least 30%, to incentivise more innovation.”

In particular, an analysis highlighting this perspective stresses that the idea is to incentivise private debt to become an instrument for reducing greenhouse gas emissions. The idea here is that in every Accord nation, entrepreneurs and financiers could raise internationally reciprocal, private tax-exempt CoVictory Bonds, Loans and Savings Funds, to finance all property, plant and equipment (PP&E) in any Accord nation. Tax free interest reduces the cost of debt by some 30% or more, driving investment in newer, cleaner technologies, while unlocking capital flows across borders.

The analysis outlines:

“Accord nations would gain access to vast tax-advantaged international capital flows for investment and development, via a new kind of internationally reciprocal leveraged supply side tax cut designed to accelerate innovation, growth, decarbonization and the expansion of free markets. Any kind of private debt used to finance PP&E or conservation investments would be tax exempt in all Accord nations, meaning no tax on interest. That reduces the cost of debt perhaps 30%.

In every Accord nation, developers, entrepreneurs, banks, hedge funds, mutual funds, financiers of all kinds could raise tax exempt debt of any kind – let’s call these CoVictory bonds, loans, even savings accounts – then pool the funds and reinvest them in any accord nation in private PP&E or conservation projects. CoVictory Funds would accelerate private capital flows between free nations, to finance conservation and ever-cleaner development projects, providing a strong incentive to join a free market framework.

These tax exempt CoVictory funds would have exactly the same kind of tech neutral, decarbonizing benefit as does capital expensing. They lower the cost of capital for PP&E, accelerating the transition to the newest, cleanest technologies, without picking winners or losers. CoVictory Funds actually make clean technologies cheaper. They also increase the return on equity, attracting investment not only to the tax exempt debt, but also the taxable equity.

CoVictory funds have the added benefit of being internationalizable, useful for driving international capital flows through inclusive investment opportunities for everyone, from billionaires to anyone who has even a bank account. By contrast, traditional tax equity subsidies, like those in the US IRA, both create trade barriers, and benefit the largest investors the most… so often exclude smaller entrepreneurs, thus holding back innovation. Picking winners and losers means, actually, you pick a lot of losers.

By contrast, without favoring some over others, CoVictory Funds could be used as a new kind of easy to use, highly democratic and inclusive international incentive to expand free markets. Or replace the CBAM with an engine of global growth and innovative decarbonization. Or strengthen the energy security ties between nations of the free world. Or help rebuild the war shattered infrastructure of Ukraine. Or Israel. Or Gaza.”

As opposed to CBAM and climate taxation, such an alternative model goes hand in hand with a more free market approach for the energy sector, which according to its proponents also delivers great economic benefits. Opponents of CBAM in emerging economies will be closely following the development of such alternatives.

Notably, also left-leaning NGOs, like Oxfam, have been criticizing CBAM. “Europeans are responsible for double the carbon emissions as the poorest half of the world,” Chiara Putaturo, an Oxfam EU tax expert has said, adding: “Yet the EU just agreed to pass the buck to those least responsible by forcing them to pay a tariff despite being hardest hit by the climate crisis. EU countries did not even accept to channel [CBAM] revenues to [international] climate finance funds.”

In response, David Luke, strategic director of the Firoz Lalji Institute for Africa at LSE (London School of Economics), told Energy Monitor: “Countries like Kenya and Ethiopia have very low-carbon power, which could help them going forward. (…) But the EU should not be punishing countries who have not been able to afford big dams or other renewable power, and there is a lot of hypocrisy here, given how the EU has been shopping around African countries to boost its own gas supplies following Russia’s invasion of Ukraine.”

He added that the reason CBAM is potentially so painful for Africa is that the opportunity it could block – trade – is the one thing African nations need to break out from the cycle of development finance and aid, saying: “You look at any country that has ever graduated from less-developed country status – Vietnam, China, Bangladesh recently – and it has always been based on trade. (…) This is why CBAM is concerning.”

 

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