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EU carbon border levy could hurt Asian developing countries, yet do little to cut emissions: ADB

India’s key export industries such as steel could be hit by the EU’s Carbon Border Adjustment Mechanism, which are designed to make sure Europe’s decarbonisation efforts are not undermined by trade partners with weaker pollution standards.

Analyses point to Indian steelmakers being the most at risk from Europe’s Carbon Border Adjustment Mechanism. Image: Karan Bhatia / Unsplash

A European Union plan to tax carbon dioxide emissions beyond its borders will hamper exports from Asia, with India and the wider South Asia region bearing the brunt of the impact, according to a new Asian Development Bank (ADB) study. 

The transnational tariff, officially known as the Carbon Border Adjustment Mechanism (CBAM), is also unlikely to lead to big reductions in greenhouse gas emissions, said the multilateral bank. 

Estimates shown through statistical modelling indicate that global carbon emissions will likely bring about an immediate fall of less than 0.2 per cent with the CBAM, relative to a scenario when only an emissions trading scheme (ETS) with a carbon price of 100 euros (US$108) is in place, an impact that researchers have described as “modest” and “very marginal”. 

This is especially due to the fragmented nature of carbon pricing initiatives in terms of sectors and regions covered, said the annual ADB report on economic integration. The study takes a closer look at global value chain decarbonisation this year, and calls for extending the CBAM to other regions, especially Asia. 

“The possibility for carbon leakage remains high if Asia is excluded, given the large production capabilities in the region,” it said. 

So-called carbon leakage occurs when companies shift production to places with laxer policies or pollution standards to reduce costs. Europe has stated that its plans to charge EU companies for the emissions embedded in imported goods aims to prevent such leakage, and protect European manufacturers from an unlevel playing field. 

The EU has been concerned that the outsourcing of manufacturing has put large parts of its supply chain beyond the reach of its ETS. The CBAM, which kicked off on 1 October 2023, will initially target steel, aluminium, cement, fertilisers, hydrogen and electricity, all carbon-intensive goods. 

Importers will first monitor and report the number of metric tonnes of carbon dioxide released from making the goods they bring in from abroad. 

Yet the ADB study also highlights how the higher carbon prices might lead to cost increases for downstream producers and drive EU firms to shift production out of the EU, with its impact on overall emissions ambiguous and unknown. 

“They are almost shooting themselves on the foot,” said Jong Woo Kang, director of regional cooperation and integration at ADB’s economic research and development impact department. Speaking at the report launch in Singapore, Jong added that pricing carbon accurately in more domestic markets would ultimately be the most efficient way to encourage a shift to cleaner forms of production and to mitigate climate change. 

The ADB report states that the EU is generally not the primary market for CBAM products originating from developing Asia, though the tariff equivalents can be large in some cases. For India, the EU accounts for more than 10 per cent of its core CBAM exports. 

The introduction of the CBAM has triggered a hostile reaction from its trading partners, including China, which is likely to see its competitive edge on exports blunted. Domestically, China’s environment ministry is taking steps to ask large industrial polluters, including its steel industry, to tighten up their emissions reporting, to tackle the challenges imposed by the EU’s carbon border tax. 

Separately, New Delhi has asked the EU for concessions, as well as discussed the possibility of imposing export taxes on CBAM-covered products sold to Europe. On Monday, the country raised its first formal complaint about the levy at the World Trade Organisation (WTO) ministerial conference in Abu Dhabi, arguing that the new mechanism symbolises “trade protectionism in the name of environmental protection”. 

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