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Trading Carbon : December - January 2011
34 BORDER CARBON ADJUSTMENTS Dec 2011/Jan 2012 www.pointcarbon.com First, the share of carbon leakage-sensitive exports of a country's total exports to the EU would be one factor to consider. These shares -- based on (2007--2009) data -- vary widely between developing countries. They are large for countries, such as Venezuela (41.83 percent), Egypt (31.19 percent), South Africa (28.10 percent) and India (23.75 percent). They are small for Thailand (5.03 percent), Malaysia (5.15 percent), Argentina (4.84 percent) and Nigeria (2.49 percent). Countries in the first group would be more affected by BCAs imposed on carbon-leakage sensitive imports into the EU than countries in the second group. Second, while the share of sensitive exports of a country's total exports to the EU matters for its trade vulnerability, this indicator has to be interpreted in light of the importance of the EU as an export market for this country. While a large share of a country's total exports to the EU could face BCAs, this might not affect this country if its exports to the EU make up only a small fraction of its total exports. It is, therefore, cr ucial to consider a country's exports to the EU as a share of its total exports. Again, there exist differences between countries. For Venezuela and Mexico, for example, the EU is not a particularly important export market with only 4.42 and 5.45 percent respectively of their exports destined for the region. For Kazakhstan, South Africa and Egypt, on the other hand, exports to the EU make up 43.83, 30.75, and 32.97 percent of their total exports respectively. The importance of the EU as an export market in the individual sensitive sectors needs to be taken into account to assess the effects on a sector. An industry could suffer from decreased revenues, if the EU was an important export market for its products and if BCAs were imposed on it. Such vulnerabilities exist for several countries. For example, 100 percent of Egypt's liquefied propane exports, 97.83 percent of Pakistan's molasses from sugar exports, 82.89 percent of Venezuela's aluminium wire exports, and 84.23 percent of India's exports of leather articles of apparel were destined for the EU market. Border carbon measures imposed on these products could seriously harm these sectors even if the EU was not an important export market. Third, sectoral coverage is a cr ucial determinant for developing countries' trade vulnerabilities to potential BCAs. Different countries export different carbon leakage-sensitive products to the EU. Their v ulnerabilities to border measures consequently lie in different sectors. Which products would face border measures would thus significantly shape the extent to which individual developing countries' trade flows would be affected by BCAs. Countries with large shares of carbon leakage-sensitive exports to the EU generally show high export values in metals, chemicals and minerals. These products are among the "common suspects" when it comes to carbon leakage and are most likely to face border measures, even if the EU decided to impose BCAs on a limited number of imports only. Countries particularly v ulnerable to border measures imposed on these products include Brazil, China, Egypt, India, Iran, Kazakhstan, Malaysia, Mexico, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand and Venezuela. A global climate agreement involving increased mitigation commitments and action by all major emitters would undoubtedly be the environmentally and economically most efficient way to address carbon leakage concerns. However, such an agreement remains elusive. Even if a climate deal were reached, it would not entirely erase the risk of carbon leakage, as the UNFCCC's CBDR principle provides for asymmetric levels of climate change actions. Countries, where large shares of exports could be affected by border carbon measures, might want to consider addressing the carbon leakage problem from within through the introduction of a price on carbon emissions, or a comparable mitigation policy. Importing countries might then not need to implement BCAs or might grant countries with mitigation activities exemptions from these measures. Having said that, many developing countries might insist that the actions they take nationally receive financing and technology support, as per agreements under the UNFCCC. Another possible solution for developing countries to address the threat of BCAs would be to impose a carbon tax on their exports to countries having a BCA scheme in place. In doing so, developing countries could not only avoid the BCAs, but also raise revenues, which could be used for domestic climate mitigation purposes. Alternatively, developing countries and trade partners applying a carbon price could pursue bilateral agreements. The former would implement mitigation activities in exchange for concessions, such as additional trade openings. This would help to address the leakage concerns, while facilitating the implementation of unpopular climate policies in developing countries. The principles of the UNFCCC, in addition to other global efforts to promote sustainable development and eradicate poverty, highlight the importance of development. Measures to tackle climate change that threaten economic development or create other negative consequences are undesirable. Therefore, solutions to address climate change and related carbon leakage concerns without compromising the prospects of a global sustainable development, in particular in developing countries, are urgently needed. l This article is based on a recent ICTSD issue paper. The article authors would like to acknowledge the help of Samatha Derksen, an international trade analyst at law firm Sidley Austin -- the main author of the paper. Ingrid Jegou is manager and Sonja Lubecki is a research assistant at the global platform on climate change, trade and sustainable energy at the International Centre for Trade and Sustainable Development in Geneva Email: email@example.com and firstname.lastname@example.org Even if a climate deal is reached, it would not entirely erase the risk of carbon leakage