The carbon tariff and the Latin American agenda – 07/21/2021 – Latinoamérica21

According to the latest Global Risk Report (WEF, 2020), climate aspects are among the top five risks that the global economy will face in the future. The report aims to examine the effects associated with two episodes. On the one hand, the emergence of “green swans”, as the financial crises caused by climate change and affecting the socio-political system are called. On the other hand, the imposition of new trade barriers based on the carbon footprint.

The carbon footprint and new trade barriers

The continuous emission of greenhouse gases (GHGs) over the past century has generated an increase in the average temperature of the planet. The seriousness of this phenomenon has been fundamental in moving forward with the introduction of a series of market mechanisms at global, regional and local levels.

In particular, the price mechanisms have gained supporters, although since their creation there has been a strong dispersion. These mechanisms predetermine the authorized emission levels and seek, with a positive environmental impact, to establish a conversion path.

Following this objective, in 2005 the European Union introduced an emission allowance trading system (ETS – EU), which operates on the principle of “cap and trade”. This mechanism imposes a cap on the total amount of emissions (decreasing over time) below which companies can exchange their surplus. The gradual reduction of the limit makes the price more expensive, which should induce investments in clean technologies.

Currently, the ton of coal is around 50 euros, with a record 56.90 euros on May 14. Europe encouraged the inclusion of an environmental perspective in its public policies, including trade. Thus, in February 2021, Brussels launched its plan for an “open, sustainable and firm trade policy”, in which it promotes an adaptation of trade instruments to the global transition “towards a climate neutral economy”. It is also moving forward with the implementation of the Green Deal (EU Green Deal), committing to achieve climate neutrality by 2050.

What is the Border Carbon Adjustment?

All this testifies to a very ambitious climate action. It is in this sense that the idea of ​​introducing a carbon adjustment mechanism at the border, known as CBAM for its acronym in English, fits in. This policy, although conceived within the framework of the search for carbon neutrality, also has broad geopolitical implications.

The European Parliament proposed the immediate inclusion of the sectors of cement, steel, aluminum, petroleum refineries, paper, glass, chemicals, fertilizers and electricity, taking into account the carbon content of the intermediate products as well as of the final product. Importers would be required to purchase a certificate whose value is associated with that adopted in the EU-ETS. Thus, the CBAM would not only balance domestic and import prices, but would also avoid being characterized as discriminatory. On the other hand, by qualifying itself as a border adjustment mechanism, the CBAM can be approved at Community level.

In addition to being economical – avoiding ‘carbon leakage’ – and environmental – reducing the level of global emissions – the EU is also seeking to establish a baseline for international standards. Thus, CBAM ends up conditioning the political spaces of the extra-zone partners and animating the “climate club”.

But while some countries could eventually join, others are directly opposed. The United States would be in the first group, although, for now, the Democratic administration remains cautious. Japan could eventually join and Russia is more reluctant. China, for its part, sees the program as a trade barrier intended to hamper its development, a view shared by large emerging economies such as Brazil, India and South Africa.

What about the needs of developing countries?

Critics also point to the inconsistency that such regulation would have with the rules established by the World Trade Organization, including the importance of taking into account the special needs of developing countries. It is questionable whether CBAM will meet these two requirements because the decision would be taken when industries in developed countries have already started the transitions towards carbon-free production.

Any resolution ultimately adopted will be political. It is worth recalling the resounding success of European environmental parties in the 2019 elections and its effect on the decision taken by the President of the European Commission, Ursula von der Leyen, to go ahead with the tax. The fact that the Beijing authorities have decided to launch their own carbon market not only reflects a greater environmental commitment, but also responds to the place that Chinese companies now occupy in the global renewable energy markets.

Regardless of the probity of the regulation, if approved, the system would affect countries without an emissions regime or where licenses are traded at very low prices. Cement exports from Colombia or Venezuela, or steel exports from Brazil could face a higher cost, assuming an externality that has so far favored their trade equation.

Even though the pandemic has accelerated the establishment of the regime, it can be said that the idea is not new. If implemented, its effects will be global. The uneven projection of the post-pandemic economic recovery adds important elements to the assessment of these policies. However, hasty adoption, ignoring global imbalances, could end up consolidating a new geoeconomy.

What is clear is that while the modalities of this process – who, when and how the rules are set – may be questionable, its future implementation seems inevitable. Latin American countries cannot ignore both components and, at the same time, fight for more equitable governance mechanisms. They need to put other resources on the agenda to close the development gap associated with climate change.

In this agenda we include financing and technology transfer, but also the consistency of current macroeconomic policies (investment and energy policies) with their future consequences, which are more sustainable based on environmental commitment. All of this raises the need to recognize the problem and urgently mobilizes Latin American governments to contain the climate problem.

* Translation from Spanish by Maria Isabel Santos Lima, a pluralist media engaged in the dissemination of critical and truthful information about Latin America

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