EU carbon border tax could hit some Asia exports but has limited impact on emissions: ADB
Some measures could be taken to reduce the pain for exporters, says the bank’s chief economist
THE new carbon border tax by the European Union could hurt exports of some Asian markets and even raise costs for EU manufacturers, the Asian Development Bank (ADB) said in a report on Monday (Feb 26).
Despite the negative trade impact, the tariff – known as the Carbon Border Adjustment Mechanism, or CBAM – may not actually reduce carbon emissions by much, the ADB found in its 2024 edition of the Asian Economic Integration Report.
CBAM imposes a carbon price on emissions-intensive products imported into the EU, such as steel, cement and fertilisers. It went into effect in October 2023 on a transitional basis, and will be fully imposed from 2026.
The tariff aims to tackle the problem of “carbon leakage” – where companies shift dirty production to countries that do not regulate emissions like the EU does under its Emissions Trading System (ETS).
The roll-out of CBAM could reduce global exports to the EU by around 0.4 per cent and Asia’s exports to the EU by around 1.1 per cent, ADB found. This projection assumes that the carbon price hits 100 euros per tonne – slightly higher than the 89.60 euros per tonne average price that S&P Global has forecasted for 2024.
The EU is generally not the primary market for CBAM products originating from developing Asia, and the tariff is only expected to have a modest negative effect on the region’s economies. “We don’t expect huge effects on GDP (gross domestic product); it’ll affect trade to Europe first,” ADB chief economist Albert Park told The Business Times.
That said, some sub-regions such as Central and West Asia, may see “significant declines” in exports to the EU, given their relatively high share of CBAM-covered exports, the report noted.
Meanwhile, CBAM could also hit downstream manufacturers in the EU itself, by raising the cost of imported raw materials. This may even encourage companies to shift downstream production out of the EU, noted Jong Woo Kang, director of the regional cooperation and integration division at ADB.
“The downstream industry will face quite high import input prices... While there could be partial offsetting of carbon leakage in the upstream, there could be a new level of carbon leakage in the downstream industry inside the EU... They are shooting themselves in the foot,” he said during a presentation at the report launch on Monday.
Reductions in EU production from CBAM could affect sectors such as computer, electric and optical equipment, and motor vehicles and parts within the bloc.
Along with the trade impact, CBAM is only likely to reduce global carbon emissions by less than 0.2 per cent, compared to having just the EU ETS at a 100 euros per tonne carbon price.
Park highlighted the limited scope of CBAM as a factor – it initially covers just six energy-intensive sectors. “Until you get more coverage of sectors and of countries, it’s just hard for this to have a huge effect on carbon reductions,” he said.
Attention on carbon pricing
Despite the drawbacks of CBAM, Park still believes that it can encourage more countries to look at having their own ETS and carbon tax regimes – which can in turn spur more companies to cut carbon emissions.
“CBAM has a role in really bringing attention to carbon pricing, and should accelerate progress towards developing systems of carbon pricing throughout the world, especially the areas that are more connected to the European economy,” he said.
The policy could also spur the development of accounting systems that better track carbon emissions, especially the difficult-to-measure “embodied emissions” – such as the carbon emissions generated during the production and transportation of goods.
CBAM has received many accusations of being protectionistic and unfair – by penalising developing economies, when it was developed countries who have historically emitted the bulk of greenhouse gases.
Asked for his stance on the matter, Park said: “I have a neutral view on that. Of course it’s a tariff and it’s designed to level the playing field... You could say it’s protectionist. But you could also say it’s born out of a willingness and commitment to really care about the climate in a way that other countries and regions have not matched.”
He suggested that some measures can be taken to “reduce the pain” of CBAM. For instance, the tariff’s revenues could be channelled back to the exporting countries.
“Where poorer countries should get some kind of help in adjusting – for many historic reasons – then it might be fairer for those revenues to get recycled, or to allow the countries themselves to impose some kind of an export fee on their producers, so that it would basically accrue to the exporting country, not the importing country,” he said.
