Border taxes on carbon emissions will not be limited to the EU

The Carbon Border Adjustment Mechanism (CBAM) pits the development of industrial capacity in poorer countries against the EU’s decarbonization goals, The Economist writes.

The mechanism, in particular, aims to prevent carbon leakage. Businesses will no longer have a competitive advantage from importing goods from outside the bloc from suppliers who do not pay a carbon price, or from moving production elsewhere.

However, poorer economies have argued that such measures constitute unfair trade barriers. And South Africa and India, among others, are considering filing complaints against CBAMs with the World Trade Organization.

The impact of the European mechanism will vary. Thus, according to a study by the African Climate Fund and the Firoz Alger Institute of the London School of Economics, this scheme will reduce African GDP by only 0.91%. Most of the goods covered by the scheme will find their way to other markets. At the same time, about 90% of Zimbabwe’s iron and steel exports, for example, go to the EU.

However, some countries will be hit hard by the CBA. A World Bank study suggests that India, Russia, and Ukraine are likely to be most affected by the mechanism, based on the carbon intensity of their exports and their dependence on trade with the EU. However, Ukraine may be exempted from paying the fees on the grounds of force majeure due to the Russian invasion.

At the same time, border taxes on carbon emissions are not limited to the EU – similar measures are being considered by the UK and Australia, among others. Several proposals for such a scheme have been submitted to the US Congress (Foreign Pollution Fee Act, Clean Competition Act).

Some countries 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 carbon market. India is considering taxing high-carbon exports destined for the European Union, keeping the revenue that the bloc would otherwise collect.

Poorer countries argue that the CBAM and other similar initiatives do not take into account the requirement of the Paris Agreement on climate change that rich countries should do more to decarbonize than poor ones. The logic behind the statement is that carbon is a production factor that should have a different price in different contexts. The EU is still considering how to respond to this criticism. According to The Economist, middle-income countries may just have to cope with this challenge.

As GMK Center reported earlier, the entry into force of the European CBAM in 2026 will lead to losses for the Ukrainian economy, which is traditionally export-oriented. In 2026-2030, total export losses could exceed $4.6 billion (over 5 years), according to a recent study by GMK Center. Ukraine is joining a long-term European trend of green transition. However, it is important for the war-affected economy to get an exemption from the CBAM.