India, South Africa, Taiwan and several other emerging economies are looking at challenging the EU’s “Carbon Border Adjustment Mechanism” (CBAM) at the World Trade Organisation (WTO). Indian Commerce Minister Piyush Goyal had previously warned that India will take “retaliatory measures” against what he considers to be unfair customs tariffs. According to estimates, these would hit Indian metal exports up to $8 billion a year.
Separately, a study by the African Climate Foundation and the London School of Economics has found that the EU’s CBAM climate levy would impose an annual cost amounting to 25 billion U.S. dollar onto African economies. African government have complained at the WTO level that this “unilateral environmental measure” risks reducing African GDP by more than 1% while doing little for the climate.
Furthermore, there are reports that India is working on its own carbon tax mechanism, aimed at taxing imports from developed countries for what India considers to be their historic carbon emissions.
Until a few years ago, negotiations at the WTO broadly pitted advanced economies against developing ones. This is no longer an applicable framework, as emerging markets are increasingly willing to stand up for their own interests @AgatheDemarais 👇 https://t.co/hNKSbyaLId
— ECFR (@ecfr) April 1, 2024
An analysis at CapX looks at an alternative policy approach, mentioning how the “Climate & Freedom International Coalition“, a group of academics and policymakers, has worked out “an alternative to current central planning policies and the collectivist “Paris Agreement”. In doing so, the group worked out a proposed international treaty, based on the premise of relying on free markets to come up with carbon-neutral solutions.
In a nutshell, this alternative model boils down to the idea of simply ending large-scale government intervention in the energy sector and thereby also abolishing all conventional energy subsidies. The idea is to encourage investment in newer, cleaner technologies.
States that ratify this treaty would then enjoy trade benefits, provided they adopt climate-friendly free-market policies. Suggestions for this 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. The latter means 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.
CoVictory Bonds, Loans and Savings Funds
Furthermore, there is the suggestion of encouraging 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)” – assets that are important to companies in the long term. The aim is to thereby 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 can 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.”
great read: A Free Market Clean Sweep for the Climate Policy Mess https://t.co/yWAs0qdsv5 via @brussels_report @Berlin_affairs
— Berlin Kommunikation (@Berlin_affairs) October 20, 2023
“Western environmental policies are harming the development of emerging economies”
Separately, Rebeca Grynspan, secretary-general of the United Nations Conference on Trade and Development, has accused Western environmental policies of harming the development of emerging economies, singling out the US Inflation Reduction Act, US legislation, initiated by the Biden Administration, which provides vast subsidies to the production of US electric cars, and similar European measures to promote green technology.
Grynspan notes:
“Developing countries see many of these policies as protectionist [but] trade and investment… are important for dynamic, sustainable growth’ in those same nations.”
Furthermore, in an analysis for ECFR, Agathe Demarais notes that “Europeans should start worrying about trade tensions with emerging economies”, as she writes:
“Something unusual happened at the 13th World Trade Organisation’s ministerial conference, which concluded in Abu Dhabi in March. For once, China was on the same side as the United States and the European Union on trade topics. This does not signal an ease in tensions between Western economies and Beijing. Instead, American, European, and Chinese negotiators briefly joined forces only to fight a common adversary: India. To say that New Delhi’s positions at the summit were hardline is an understatement. Indian representatives obstructed most key negotiations, including a reform of fishery subsidies; the extension of a moratorium to avoid tariffs on digital services; and the conclusion of a deal to boost foreign direct investment in developing economies.
India’s official explanation for its stubborn naysaying was seemingly simple – New Delhi does not want to see non-trade issues, from fighting overfishing to facilitating global investment flows, crop up in multilateral trade negotiations. This is odd. In Abu Dhabi, India’s “offer to the world” was hardly a core trade issue: the country sought to promote the adoption of Unified Payments Interface, its homegrown financial mechanism for sending remittances. Leaving negotiator frustration aside, scratching beneath the surface of India’s official talking points paints a worrying picture for Europe’s relations with emerging economies. New Delhi’s determination to stand up for its own interests in Abu Dhabi illustrates rising global resentment towards EU trade policies. Other developing economies, also frustrated with the EU’s approach, may soon follow suit, fuelling the risk of trade wars between Europe and the global south.”
Picture: The World Trade Organization Ministerial Conference of 1998, in the Palace of Nations (Geneva, Switzerland). Copyright: World Trade Organization from Switzerland, CC BY-SA 2.0 <https://creativecommons.org/licenses/by-sa/2.0>, via Wikimedia Commons