By Meghaa Gangahar
The world is engaged in thorough discussions over climate change. While some have hastily dismissed it as a hoax, many have endeavoured to find viable mitigation policies. One such measure gaining momentum is that of border carbon adjustments (BCA). These refer to the carbon tax adjustments at the border for regulating imports and exports.
What are border carbon adjustments?
In a nutshell, BCAs are trade measures. These trade measures work well in filling the plot-holes in the story of the differing carbon tax system across the world. BCAs could either supplement a domestic carbon tax, or a cap-and-trade system. The first one refers to a tax on imports which is equivalent to the domestic tax. The cap-and-trade, however, requires the exporting countries to purchase emission permits. The design details of a BCA determine its WTO-legality. The scheme has to account for foreign policies and consider the climate change efforts of all individual countries engaged in trade. Also, they would have to adhere to the WTO’s GATT (General Agreement on Trade and Tariffs) expectations.
If a country with a higher share in global trade imposes border adjustments for carbon content, this could influence carbon tax policies of other nations as well. Adjustments for both imports and exports of one country exclusively will result in an uneven playing field internationally. The foreign imports will face taxation, while domestic exports will receive a rebate. This would skew the cross-border trade flow in favour of exports. This will urge its trading partners to adopt carbon pricing in order to restore competitiveness.
Addressing the ‘leaks’
The broad aim of the carbon adjustments is to curb greenhouse gas emissions.
It is not environmentally viable for the domestic country to have carbon pricing systems while lacking border adjustments.
The fall in the domestic production and emissions will be offset by cheaper imports to meet consumption. The demand for cheaper imports will encourage production in countries having lower production costs due to lax environmental regulations. Thus, in the absence of border carbon adjustments, the emissions will just relocate to another part of the world. This phenomenon is also referred to as a ‘Carbon Leakage’.
One such example is of the steel industry in Europe. The Emissions Trading Scheme (ETS), put forth by the European Union in 2005 is a noble effort. Its cap-and-trade system has done wonders to curb domestic emissions, although some industries – most notably steel – have taken a hard punch. The domestic steel plants are on the verge of closure. The steel consumption in Europe, however, did not take a hit. This is due to the massive increase in the imports of Chinese steel in Europe, while China’s share in global emissions continued to climb up the chart.
Cutting down on emissions: China to follow?
According to a World Bank report, there has been a substantial growth in carbon pricing throughout the world. Since 2012, the number of countries with carbon pricing systems has doubled to about 40. At present, carbon pricing instruments cover around 12 percent of all global emissions, with the share increasing constantly. Over half of the pledges to the UN in the Paris agreement included intentions of partaking in the international carbon market. China has unarguably made the game-changing commitment – the largest emitter of greenhouse gases worldwide. China has clearly stated its plan to curb its emissions when it launches the world’s largest carbon market in 2017.
A carbon tax will encourage producers to find the most efficient path to minimise their carbon footprint. It will facilitate investment in technological innovation and infrastructure, thereby stimulating green economic activity. Border adjustments will further ensure this, by protecting the producers from a cross-border disadvantage. Recently, America’s Climate Leadership Council unveiled a report on ‘Carbon Dividends’. The concept of carbon dividends provides regulatory relief by diverting the funds collected from the carbon tax and pumping them back into the economy in other sectors. This is a step forward on the path of inclusive economic growth in an environmentally stringent regime.