Questions such as these are being debated at the ongoing 26th Conference of Parties, where world leaders are negotiating on rules on carbon markets under Article 6 of the Paris Agreement.
But unless rich countries help developing economies like India access the funds and technology needed to transition to clean alternatives, a carbon border tax penalising the export of carbon-intensive products such as steel and cement would be unfair, say experts.
Why did decarbonising of global trade become imperative? Around 27% of global carbon dioxide emissions in 2015 were linked to international trade, according to an Organisation for Economic Co-operation and Development paper published in 2020.
In July 2021, the EU imposed a border tax on imports of carbon-intensive products as part of its strategy to cut greenhouse gas emissions by at least 55% by 2030.
The EU is India’s third largest trading partner and accounted for €62.8 billion worth of trade in goods in 2020, or 11.1% of India’s total global trade.
The idea of a carbon border tax imposed by developed countries was criticised in October 2021 by the UN Conference on Trade and Development for potentially burdening developing economies that still depend heavily on coal, limiting their exports and constraining their budget for climate action.
Domestic carbon tax, as opposed to one imposed at the global level, has a problem as the EU experience has shown.
The strength of a carbon border tax is its potential ability to shift the burden for mitigating the damage caused by climate change to market players who are actually responsible for it, according to the World Bank.
The carbon tax can also help deal with the complications created by the difference between produced and consumed emissions in an interconnected global economy, said Aman Srivastava, fellow at the Centre for Policy Research.
The carbon border tax expects developing countries to stick to the environmental standards set by developed countries and this violates the principle of ‘common but differentiated responsibility’ in the Paris Agreement, said the October 2021 UNCTAD report.
In countries whose economic structures depend on energy-intensive activities, as is the case with major steel and cement exporters, competitive disadvantages in international markets could result in job losses, according to the July 2021 UNCTAD report.
“With the EU’s carbon border tax, countries, including developing countries, stand to be taxed for emissions that aren’t even contributing to their own domestic consumption.
As we reported in October, in 2009, developed countries had pledged to deliver to developing countries an annual climate fund of $100 billion by 2020.
The October 2021 UNCTAD report has also suggested a differential approach for developing and developed countries that would be more equitable.
Countries could also develop a carrot-and-stick carbon tax system, said Fernandes of Climate Risk Horizon.
In developed countries, where most technological developments occur, patents are used to incentivise innovation but these also end up making them unaffordable for poorer economies.
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