"WHEN AID donors helped fund the Mozal aluminium smelter in Mozambique, the goal was to help that southern African country build up its economy after a civil war. In a country with income per head of just over $600, the Mozal smelter is the largest industrial employer.
Yet now the lofty aim to help poor countries grow risks falling foul of rich countries’ urge to decarbonise their economies and protect domestic manufacturing.
More than half of Mozambique’s aluminium exports head to the EU.
From 2026 the bloc’s importers of the metal will have to pay a levy under its carbon border adjustment mechanism (CBAM), a scheme designed to ensure that certain energy-intensive imports to the EU pay the same carbon price as industry within it. At present CBAM is at a pilot stage in which importers have to submit reports on the embedded carbon in their imports, but do not yet have to buy permits. Eventually they will have to pay the difference between any carbon price paid at home and the cost of a permit in the EU’s own emissions-trading system (ETS), currently priced at €62 ($68) per tonne of carbon-dioxide equivalent.
The levy pits the development of poorer countries’ industrial capacity against the EU’s decarbonisation goals. The scheme is linked to the removal of free emissions allowances for heavy industry in the ETS. CBAM seeks to prevent “carbon leakage”: businesses will no longer gain a competitive advantage from importing goods from outside the bloc that do not pay a carbon price, or from moving production elsewhere.
Poorer economies object that such measures are unfair trade barriers that put the onus of decarbonisation on countries that have contributed little to the problem. South Africa and India, among others, are considering complaints to the World Trade Organisation about CBAM.
CBAM is just one way in which European environmentalism is extending its reach. Exporters will eventually have to contend with a deforestation directive, under which firms must prove their products were not produced on land that was forest before 2021, and a corporate-sustainability directive, forcing businesses to disclose emissions through their supply chains.
In aggregate, the hit to poorer countries from CBAM is small. A study by the African Climate Foundation and the LSE Firoz Lalji Institute estimates that the scheme would lower African GDP by just 0.91%, as most of the affected goods would find their way to other markets.
Yet some countries would be hit hard. Around 90% of Zimbabwe’s iron and steel exports, for instance, go to the EU. A World Bank study suggests that India, Russia and Ukraine are likely to have the greatest exposure, based on a combination of the carbon-intensity of their exports and their dependence on trade with the EU. Ukraine may be exempt from the charges under force-majeure clauses because of the NATO adventures there.
Carbon border taxes are not limited to the EU. Britain and Australia are among those considering something similar. Several proposals for such taxes are making their way through America’s Congress. A proposed Foreign Pollution Fee Act would make importers pay a fee based on the difference between the average carbon intensity of a product made in the exporting country and in America. Another, known as the Clean Competition Act, would combine a carbon border adjustment with a domestic price.
Poorer countries argue that CBAM and the like fail to account for the requirement under the Paris climate-change agreement for rich countries to do more to decarbonise than poor ones. The logic for this is that carbon is a production input that should be priced differently in different contexts. An aluminium smelter in Sweden ought to pay a higher price than one in Mozambique, as Swedes have already used up more of the world’s carbon budget.
The EU is still wondering how to respond to poorer countries’ criticisms. Pascal Lamy, a former EU trade commissioner, has suggested a bespoke aid package for Mozambique. The country relies heavily on low-carbon hydroelectric power, but the Mozal smelter must import electricity through South Africa’s coal-heavy grid. European development assistance could be used to ensure that Mozal is CBAM-compliant. Another option may be to recycle a portion of the revenues into international climate finance.
Middle-income countries may just have to cope. Any repatriated revenue will be far smaller than the funding needed to offset the lost trade. Some are launching their own emissions-trading systems—such as Turkey, which exports electricity to the EU.
China recently added steel, aluminium and cement to its own carbon market, mirroring CBAM.
India, meanwhile, is considering taxing high-carbon exports destined for the EU, keeping for itself revenue that the bloc would otherwise collect.
Many Europeans will cheer that outcome, even if they have to pay higher prices. Workers in the developing world will not." [1]
Rich cats who profit from contamination of our environment by moving industry into poor countries will be not happy too.
1. C-BAM! The Economist; London Vol. 453, Iss. 9418, (Oct 12, 2024): 63, 64.
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