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Trading Carbon : December - January 2011
33 BORDER CARBON ADJUSTMENTS From a political perspective, any impact on developing countries would need to be considered in light of the principle of "common but differentiated responsibility" (CBDR), a core principle of the UN Framework Convention on Climate Change. CBDR places a relatively higher burden on developed countries for addressing climate change, because historically they have contributed more to the increased levels of GHGs in the atmosphere. The EU is a pioneer in pricing carbon emissions through its ETS. But the region is potentially susceptible to distortions in competitiveness as well as to carbon leakage. Efforts by the EU to identify the sectors most vulnerable to distortions offer a valuable base for analysis. They examine the effects of EU policies and provide an example of how countries and regions may proceed with unilateral climate change mitigation and address carbon leakage concerns. At the same time, the EU is an important export destination for many developing countries. Policy measures put in place by the bloc that may impact trade opportunities and hence the development perspectives of these countries need to be analysed. Currently, the EU has no legislation in place that foresees the implementation of border carbon measures on stationary industry. The prime means for addressing leakage risks remains allocating emission allowances free of charge, thereby lowering the climate policies' burden for emissions- and trade-intensive sectors. However, recent developments, notably the inclusion of imports in the aviation sector in the ETS, makes a case for considering a future European BCA scheme as a possibility. Indeed, the EU has discussed BCAs as a solution to the undesired side-effects of the EU's unilateral emission targets. A full analysis of the economic and social effects of potential EU BCAs for developing countries would require estimates of the carbon cost on the affected trade flows and of the exports' GHG intensities. But it is possible to assess the shares of developing countries' exports that could be affected by potential EU border carbon measures. The analysis below outlines some of the potential impacts on developing countries' trade flows if the EU decided to put BCAs in place. Knowing which products would face BCAs is necessary to assess developing countries' vulnerabilities to such measures. While the EU's list of carbon leakage-sensitive sectors serves as a useful point of reference, analysing the impact of border measures on developing country exports requires refining this list, given that the share of these products makes up 82 percent of total EU imports -- a proportion unlikely to be entirely affected by BCAs. The EU division of carbon leakage-sensitive sectors into different categories allows making reasonable assumptions regarding such a refinement. Sectors classified as carbon leakage-sensitive on the basis of a high trade intensity and predicted cost increases, as well as those qualifying because of important cost increases only, can be considered to be more likely to face BCAs. On the other hand, sectors identified as carbon leakage- sensitive based merely on their trade intensity are less likely to face border carbon measures for two interlinked reasons. Imposing BCAs makes little sense from an environmental point of view since they are not major contributors to GHG emissions and hence not at great risk of being affected by policies that involve a carbon price. Consequently, it would be difficult to justify such a measure with respect to World Trade Organization (WTO) law and, in particular, Article XX of the WTO's General Agreement on Tariffs and Trade (GATT), which under specific circumstances provides for exceptions based on inter alia environmental concerns. If the EU were to introduce BCAs, it seems reasonable to assume that the tax would be levied on carbon leakage- sensitive products from large-emitting countries that have lower or no carbon costs. Least Developed Countries (LDCs), however, would likely be excluded. This can be inferred from the EU's statement -- in its 2011 "Building a post-2012 climate regime: the EU's contribution" paper -- that "[a]ction by developing nations (except the least developed countries) is also needed to limit the rapid growth in their emissions". The table shows the developing countries assumed to face BCAs because of their status as large emitters. If the EU opted for the implementation of border measures on carbon leakage-sensitive imports, this could affect shares of developing countries' exports to that region. Several factors could influence the extent of the BCAs' impact on developing countries' trade flows, some of which are assessed below. Dec 2011/Jan 2012 Annual GHG emissions for developing countries responsible for >0.5 percent of global GHG emissions, 2005 Country Million Mt CO2e emissions (rank) Percentage of global CO2e emissions Per capita Mt CO2e emissions (rank) China 7,232.8 (1) 19.13% 5.5 (84) India 1,859.0 (5) 4.92% 1.7 (149) Brazil 1,011.6 (7) 2.68% 5.4 (87) Mexico 645.0 (10) 1.71% 6.3 (75) Indonesia 583.2 (12) 1.54% 2.7 (118) South Korea 568.9 (13) 1.50% 11.8 (29) Iran 559.2 (15) 1.48% 8.1 (61) South Africa 422.2 (20) 1.12% 9.0 (54) Saudi Arabia 376.6 (22) 1.00% 16.3 (16) Thailand 351.1 (24) 0.93% 5.3 (88) Argentina 326.6 (25) 0.86% 8.4 (59) Nigeria 297.3 (26) 0.79% 2.1 (136) Taiwan1,2 283.8 (27) 0.75% 12.4 (26) Venezuela 260.4 (28) 0.69% 9.8 (48) Pakistan 239.7 (29) 0.63% 1.5 (154) Malaysia1 235.9 (30) 0.62% 9.2 (52) Egypt 227.2 (31) 0.60% 2.9 (113) Kazakhstan 202.5 (33) 0.54% 13.4 (22) Note: excludes land use change 1 PFC, HFC & SF6 data not available 2 Non-UNFCCC Party SOURCE: CAIT VERSION 8.0 (2011).