Europe's new carbon tariff won't help the climate

Many within the European Union probably view its new Carbon Border Adjustment Mechanism as an enormous step forward in the fight against climate change and for the EU's own global prestige. And it is true that the EU has achieved internal consensus — always a difficult process — surprisingly quickly. In the process, it has decisively shifted the debate on trade and the environment in the 21st century.

Yet countries in the global south have a clearer view of what the new tariffs will mean. They don't look like much of a win for the climate — or for the EU's reputation.

The problem is not just that companies in some sectors — steel, cement and fertilizers among others — will now have to pay a tariff at the EU border based on the amount of carbon used to make their products. A potentially bigger issue is that, in order to work out what they owe, they will have to fulfill paperwork requirements at the level required for EU companies. High compliance costs effectively represent an additional, unspoken tariff.

When those secondary costs are taken into account, European companies and those in the global north that are already part of emissions trading schemes or in jurisdictions with greater administrative efficiency will have a clear competitive advantage in the European market. Countries in the global south that lack really granular emissions data — required for accurate, producer-specific certifications — will be at a major disadvantage.

That this is unjust is hardly surprising. Most restrictions on trade cause injustice of some sort. Still, the scale of the potential transfer from poor to rich is shocking: One academic analysis estimated that "the welfare gain in selected developed countries [from a full-spectrum CBAM] amounts to $141 billion, and the annual welfare loss in developing countries amounts to $106 billion" per year. How can the EU talk of "climate justice," given such numbers?

What should further concern EU activists is the likelihood that the new mechanism may slow rather than boost global decarbonization efforts.

The EU argues that the new tariffs will merely prevent "carbon leakage." Without them, companies engaged in cheaper, high-carbon production might have an edge over those that have invested in shrinking their carbon footprints.

In fact, it's more likely that the new European mechanism will create two distinct supply chains: one between countries that already boast emissions trading schemes and EU-level administrative capacity, and a far dirtier one between poorer nations. One will supply high-income countries and one the rest of the world.

Rather than decarbonizing, companies in the global south will have every incentive to focus on the latter group of nations. Those are precisely the regions where, over the next decade, the most concrete will be poured and steel will be used. Indeed, the biggest growth in potential emissions over the next decade will come from production and consumption in the global south.

If the new European mechanism worked as intended and encouraged all companies to decarbonize, those emissions might be reduced. In reality, developing-world companies will likely emit just as much carbon as they otherwise would have, having given up on complying with unrealistic European standards.

The idea of carbon border adjustments can still be saved. Some have called for using the revenues raised from border tariffs to support decarbonization in the global south. A "global climate alliance" proposed at COP27 recently focused on finding credible ways to incentivize decarbonization through sharing the revenue from carbon taxes. Unfortunately, the European Parliament has already happily spent some of that money on bribing some of the EU's eastern members into agreeing to the European Green Deal.

A workable climate alliance could build on the G-7's "climate club" idea by offering differential treatment to its members. Such efforts should include the creation of region- or country-specific pathways for compliance with Europe's new rules. Lower verification requirements could be imposed on exporters from Bangladesh, for example, alongside a less stringent carbon tariff than that levied on exporters from China or the United States.

Either way, European policymakers can't suppose that imposing this new tariff is the end of the road. If they care about the global fight against climate change, they will have to make sure they understand the long-term effects such unilateral measures have on other countries' decarbonization efforts. And if Europe values its global reputation, it should find ways to help those nations comply with its rules.   

Mihir Sharma is a Bloomberg Opinion columnist. A senior fellow at the Observer Research Foundation in New Delhi, he is author of "Restart: The Last Chance for the Indian Economy." @mihirssharma

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.