‘Unfair’ EU carbon tariff could spur Asia to develop separate pricing schemes: ADB chief economist

AN UPCOMING tariff on carbon-intensive imports into the European Union (EU) is potentially “unfair” for Asian exporters, given the region’s role as a global manufacturing hub, Asia Development Bank’s (ADB) chief economist Albert Park said in an interview with The Business Times (BT).

“If you were very critical, then you could say this is just a way to protect European industry,” said Dr Park. “And they are picking industries where they feel a competitive threat. They are not doing this for all goods and sectors... it’s clearly targeted to protecting their producers in these sectors.”

If manufacturers move to countries with less strict environmental policies, overall emissions rise, in what is known as “carbon leakage”. To prevent this, as well as to level the playing field for industries that already pay for their emissions, the import tax will apply to products that are not manufactured to the same environmental standards as those in the importing country.

Asian exporters that do not meet EU standards could thus be subject to the tax, which is part of the EU’s Carbon Border Adjustment Mechanism (CBAM). The CBAM will apply from October 2023 in a simplified form, reaching full implementation in 2026.

The more “just” way to do it, said Dr Park, would be for countries that adopt CBAM to channel the tax revenue back to poorer countries to help improve their carbon efficiency, rather than keeping the funds.

This comes as a new ADB report on Asian economic integration on Tuesday (Feb 7) said that Asia is among the regions most vulnerable to climate risks, while also emitting the most carbon dioxide (CO2).

The region’s persistent position as a net CO2 emissions exporter reflects its role as a major provider of products to serve global demand, said the report, adding: “Consumption demand in advanced economies might have not been met without Asia’s rapid expansion of production capacity, which also increased CO2 emissions as a byproduct.”

What this means, said Dr Park, is that Asia is “paying the pollution price and the carbon” to serve Western consumers. “That seems like the money flow is going in the wrong direction, from poor countries to rich, when investments should be going from rich countries to poor countries.”

A 2020 study estimated that 92 per cent of excess CO2 emissions from 1850 to 2015 can be traced to industrialised nations in North America and Europe, as well as Australia, Israel, Japan and New Zealand.

SEE ALSO

Asia can attract more FDI with greener treaties: ADB

Can degrowth save us from destruction?

Regardless of historical responsibility, however, Dr Park said there is a need to focus on where progress can be made.

“I’m not going to hold my breath waiting for the US and Europe to feel, ‘Oh, it’s our fault, let’s pay for everything’ – even though maybe they should,” he said. In the meantime, there is a lot of room for Asia to reduce emissions by switching to cleaner technology, and for governments to shift to a cleaner energy mix.

One positive outcome of the CBAM is that it could force countries outside the EU to seriously consider introducing carbon pricing – which means Asian governments may levy a similar carbon tax, instead of letting their exporters pay the EU.

“So you kind of force these countries to move faster, you’ve given them a lot of incentive to move faster and that is a potential benefit,” Dr Park said.

Imposing a carbon tax, he added, is a very efficient and inexpensive way to help countries achieve their net-zero goals, compared with other ad hoc regulations. But it is politically difficult to push through, and countries have been reluctant to do so due to fears of backlash.

Regional cooperation could be critical here, as governments and businesses may be more accepting of carbon pricing if many countries adopt it at the same time, he noted, though the looming global economic downturn could make this an even tougher sell.

ADB to upgrade forecast soon

But Dr Park appeared sanguine about economic prospects in Asia, with China’s reopening “really beneficial in the region” and likely to offset the drag from the United States and the EU.

“The faster that the Fed can complete its interest rate hikes to control inflation in the US, the faster everything will go back to a more expansionary recovery globally, and that would also benefit Asia,” he said.

Europe has also benefited from a warm winter, which lowered the energy cost pressures on consumers and thus “created a kind of space for people maybe to spend a little bit more money”, he added.

He told BT that ADB will “almost definitely” upgrade its 2023 growth forecast for developing Asia in its outlook report in April, “if nothing crazy happens” between now and then.

Vietnam and the Philippines are the brightest spots in the region, he pointed out, with the former continuing to be “the darling country for investors”, especially those that want to move out of China. The Philippines, he noted, has taken a pragmatic approach in balancing economic growth and the need to ease inflation.

In December, ADB trimmed its 2023 growth outlook for Asia to 4.6 per cent, from 4.9 per cent previously. The Manila-based lender also lowered its forecast for South-east Asia to 4.7 per cent, from 5 per cent.