‘ ‘Border Carbon Adjustment Measures and Small States’ Peter Holmes University of Sussex June 13th 2011 27/06/2016 1 BCAs and small states: Outline • Why pressure for BCAs? • Why has it been resisted so far? – “Leakage” seen as quite limited. – BCAs ineffective and hard to operate. – Risk of disputes at WTO. • Small and LICs – a few directly at risk • Implications: – Press for climate deal. – Seek shelter through FTAs? 27/06/2016 2 Why Border Carbon Adjustments? • Carbon Emissions can be restricted by taxing carbon emissions or by issuing permits up to a fixed quota which can be used or sold as in EU Emission Trading Scheme; or by other regulatory means. • EU (and US) firms argue they suffer an unfair disadvantage if others are not subject to equivalent limits and risk of “Carbon leakage”. • Pressure for measures on imports to match those on home products either a tax or making importers buy permits as if they had factories in the EU. And • Any excuse for protectionism! 27/06/2016 3 Risk but no BCAs yet. Why? • US hasn’t yet got emissions regime! • Eur. Comm. (and most MS) believe: – Risk of leakage surprisingly small overall; but a few sectors could be hit. – Better to compensate at-risk industries by free allocation of permits. (Many firms prefer this). – Costs of BCAs exceed gains in terms of likely WTO disputes and admin complexities of making it work. 27/06/2016 4 Carbon leakage and competitiveness • Leakage is % of emissions reductions, eg in EU, offset by rises elsewhere. • On environmental grounds we care if emissions don’t fall. • Competitiveness. We also worry about jobs. • So EU steel firms might still demand BCAs even if China had reduced emissions hugely – but only by imposing costs on aluminium smelters. (Actually they don’t). 27/06/2016 5 Latest study for EC says leakage risk limited and BCAs ineffective • “The main result from our modelling exercise is the finding that carbon emission leakage due to direct loss of competitiveness via the trade channel is very small. Global competition distortions caused by the absence of a carbon price in countries with no binding pledges result in direct leakage effects of 2% or less.” • “Another major difference with earlier studies is the limited effect that border measures (BM) have on leakage in our simulations.” Paradoxically, emissions cuts by EU would reduce demand for fuel and its price and that could cause leakage! • “Measures taken by countries with binding pledges to reduce emissions reduce global demand for energy and thus reduce global energy prices.” Johannes Bollen, Paul Koutstaal and Paul Veenendaal Trade and Climate Change . Netherlands CPB for EC, April 2011 • So we need global agreements but not BCAs 27/06/2016 6 Top UK CO2-intensive subsectors. Cumulative Gross Value Added under 2% of GDP (Source Demailly et al, 2007:6) 27/06/2016 7 Free allocations • ETS scheme identifies industries at risk and gives a high (but lessening) share of their estimated carbon permits free. • This offsets the cost and allows most efficient firms to sell permits at a profit. • But – Are too many free permits given? – Are they subsidies under WTO rules? 27/06/2016 8 BCA complexities • If BCAs are adopted, exact method matters. How are carbon footprints of imports estimated – huge scope for debate. - actual, importer average, exporter average? Impossible to be accurate for complex products Virgin steel vs scrap. Mozambique Al – which electricity does it use? Are carbon charges destination (consumption) based or origin (production) based? - if destination all imports pay and exports get rebates • Huge scope for disputes at WTO 27/06/2016 9 WTO rules messy • BCAs may be WTO legal if – do not arbitrarily discriminate between home and foreign products (Art III/XX). – Serve legitimate goal under Art XX (cf Shrimp Turtle). • But no agreement on what this all means. • Any derogations for small & LICs would have to be non discriminatory as between similar countries. • Risk of WTO Appellate Body making up rules. 27/06/2016 10 Impact on small and low income countries • Most small and LICs do not produce high carbon products – but with significant exceptions – eg Zimbabwe steel, Mozambique aluminium. • Some others potentially affected eg Vietnam ceramics. Petrochemicals. Niger. • Limited effect if BCAs only on carbon intensive products BUT problems if measures widened or if documentation demanded. 27/06/2016 11 Energy-intensive exports from LICs and LMICs to the EU Country Class Mozambique Tajikistan Armenia Ukraine Moldova Zimbabwe Egypt Jordan Georgia India Albania Iran Cameroon Tunisia Ghana China Indonesia Uzbekistan LIC/LDC LIC LMIC LMIC LMIC LIC LMIC LMIC LMIC LMIC LMIC LMIC LMIC LMIC LIC LMIC LMIC LIC Morocco LMIC Energy intensive exports (2004-2008) Energy intensive Trade $m pa (2004-2008) 84.5% 71.4% 39.7% 32.5% 22.9% 22.8% 16.6% 14.0% 12.1% 8.2% 6.7% 5.3% 5.2% 4.2% 4.2% 4.0% 3.6% 3.0% 1203 184 1862 782 180 115 1426 53 76 2494 47 879 157 447 403 10387 570 32 3.0% 31 Source C. Brandi International Trade and Climate Change: Border Adjustment Measures and Developing Countries DIE 2010 27/06/2016 12 Energy-intensive exports from LICs and LMICs to the US Country Class Energy Energy intensive intensive Trade exports $m pa (2004-2008) (2004-2008) Tajikistan Ukraine Zimbabwe Georgia India Indonesia China LIC LMIC LIC LMIC LMIC LMIC LMIC 74% 62.9% 50.3% 49.8% 7.0% 3.2% 3.0% 51 973 48 85 1569 458 8488 Source C. Brandi International Trade and Climate Change: Border Adjustment Measures and Developing Countries DIE 2010 27/06/2016 13 Possible responses • Multilateral climate deal essential but meanwhile.. • BCAs create further incentive for small and LICs to join FTAs with some common rules on mutual recognition/equivalence of emissions schemes in exchange for exemption from charges (maybe escaping WTO rules on derogations). • FTA could be good opportunity for low cost regulatory reform - much energy saving actually reduces costs. 27/06/2016 14 Conclusions • BCAs are an “obvious” solution to carbon leakage; but actually very undesirable, even if not ruled out by WTO. • Small states should actively campaign for climate measures to minimise likelihood of BCAs. • Most small states not directly at risk but would suffer from trade wars. • Perhaps consider including in FTA discussions. 27/06/2016 15