The EU’s carbon border tax could hurt developing countries

(Eco Business, 27 Jun 2022) Firms may choose to bring manufacturing plants back to the EU to avoid bureaucracy, hurting the economies of the nations that once hosted them. The bloc should help to fund costly decarbonisation programmes using tax money.

In July 2021, the European Commission did something that no other major governing body had ever attempted: It tied trade policy to climate policy. Reaching the European Union’s goal of cutting net greenhouse-gas emissions by 55 per cent by 2030 will require the EU to reduce emissions both at home and beyond its borders. To this end, the Commission’s Fit for 55 initiative, a package of proposals aimed at meeting the bloc’s emissions-reduction target, includes a carbon border adjustment mechanism (CBAM) – an import tax designed to corral other countries into tackling climate change.

The CBAM would tax imported goods sold in EU markets on the basis of their carbon content – the emissions required to produce them – which depends on their material and energy inputs. The proposed levy is intended to address so-called carbon leakage, which occurs when businesses in the EU move production to non-member countries with less stringent emissions rules.

In other words, Europe would no longer ignore the climate effects of foreign goods. But while the measure could help to reduce emissions and level the competitive playing field for EU-based firms, the trade protectionism that it entails risks hurting developing countries.

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Eco Business, 27 Jun 2022: The EU’s carbon border tax could hurt developing countries