EU’s Carbon Border Levy Risks Impact on Asian Economies with Limited Emission Reductions

In a bid to bolster its decarbonization efforts without compromising on global trade fairness, the European Union (EU) has proposed the Carbon Border Adjustment Mechanism (CBAM). However, as per a recent study by the Asian Development Bank (ADB), this move could have significant repercussions, particularly for key export sectors in India and South Asia.

The CBAM aims to level the playing field by ensuring that imports into the EU adhere to similar environmental standards as those within the bloc. While this may seem like a step forward in the fight against climate change, the ADB study sheds light on some critical nuances.

Firstly, industries such as steel, vital to India’s export economy, could face substantial hurdles due to the CBAM. The mechanism, while intended to curb emissions, might not deliver the desired impact, with projections suggesting only a marginal reduction in global carbon emissions.

One major reason for this limited effect is the fragmented nature of existing carbon pricing schemes worldwide, particularly in terms of sectoral and regional coverage. The ADB report underscores the necessity of extending the CBAM beyond Europe, especially to Asia, where significant production capabilities reside.

The concern over “carbon leakage” looms large in this context. If Asia remains excluded from such regulatory frameworks, there’s a risk of companies relocating production to regions with less stringent environmental policies, leading to a net increase in global emissions.

Europe’s rationale behind implementing the CBAM is to prevent such leakage and safeguard its industries from unfair competition. However, the ADB study urges for a more inclusive approach, emphasizing the need for global cooperation in tackling climate challenges.

As engineers invested in environmental engineering and trade dynamics, understanding the implications of initiatives like the CBAM becomes paramount, especially in the context of international expos such as those in China. It’s not just about mitigating carbon footprints but also ensuring equitable and sustainable growth for all stakeholders involved.

The European Union (EU) has expressed growing concerns over the globalization of manufacturing, which has often placed significant segments of its supply chain beyond the scope of its Emissions Trading Scheme (ETS). To address this, the Carbon Border Adjustment Mechanism (CBAM) was initiated on October 1, 2023, targeting carbon-intensive sectors including steel, aluminium, cement, fertilisers, hydrogen, and electricity.

Under the CBAM, importers are tasked with monitoring and reporting the carbon dioxide emissions associated with the production of goods imported from abroad. While this move aims to align imported products with EU environmental standards, the Asian Development Bank (ADB) study underscores potential complexities.

While higher carbon prices could incentivize cleaner production practices, there’s a flip side to the coin. The ADB report warns that increased costs for downstream producers could prompt EU firms to relocate production outside the EU, potentially offsetting any emissions reductions achieved. Jong Woo Kang, Director of Regional Cooperation and Integration at ADB, emphasized the importance of accurately pricing carbon within domestic markets to foster sustainable production practices and combat climate change effectively.

Interestingly, the EU isn’t necessarily the primary market for goods subject to CBAM from developing Asian countries. However, the tariff implications could be substantial, particularly for nations like India, where over 10% of core CBAM exports are destined for the EU market.

The introduction of CBAM has sparked backlash from trading partners, notably China, whose competitive advantage in exports might suffer. Responding to this challenge, China’s environment ministry is urging industrial polluters to enhance emissions reporting, aiming to navigate the implications of the EU’s carbon border tax.

On the diplomatic front, New Delhi has engaged with the EU, seeking concessions and exploring the option of imposing export taxes on CBAM-covered products destined for Europe. In a bold move, India raised its concerns at the World Trade Organization (WTO), labeling the CBAM as “trade protectionism in the name of environmental protection” during the recent ministerial conference in Abu Dhabi.