Devising a Response to Carbon Border Adjustment Mechanisms for G20 Countries

In this article published by the Think20 (T20), our team at International Economics Consulting Ltd sheds light on the critical subject of Carbon Border Adjustment Mechanisms (CBAMs) and their potential trade impacts on developing nations.

To effectively address the problem of carbon leakage and ensure a level playing field for global trade, numerous countries, including Canada, Japan, the United Kingdom, the United States, and the European Union (EU), are contemplating the adoption of CBAMs. These mechanisms are designed to impose a tariff on imports in order to match the regulatory costs related to carbon emissions incurred by domestic producers. However, the implementation of CBAMs raises concerns among developing countries, with severe impacts on export competitiveness and overall welfare.

This policy brief underscores the potential trade impacts of CBAMs, specifically analysing the proposed EU model which targets six sectors initially. Using a Computable General Equilibrium (CGE) model, the paper simulates the effects of CBAMs on trade, welfare, and carbon dioxide (CO2) emissions under the assumption of a US$100/tCO2e carbon tax applied by Western Europe and the US. The results highlight the disproportionate impacts of CBAMs. For instance, South Africa, India, and Russia are expected to witness the largest declines in exports among G20 countries, with reductions of 0.9 percent, 0.6 percent, and 0.5 percent, respectively. Exports from China would register the largest absolute loss of US$11 billion following the CBAM. On the other hand, Canada, the UK, Brazil, and the EU could see an increase in exports, benefiting from an improvement in their terms of trade.

Given this disparity, the policy brief also presents a series of policy recommendations to the G20 to effectively prepare for and adapt to the implementation of CBAMs. These recommendations focus on advocating for multilateral solutions, adopting international reporting standards, building the capacity of developing countries in adopting climate-friendly production techniques, redistributing CBAM revenues for climate finance, and providing special and differential treatment for developing nations. The G20, as the world’s leading forum for advanced and emerging economies, plays a crucial role in initiating high-level global political dialogue on climate issues and promoting international coordination. By fostering dialogue and understanding diverse perspectives, the G20 can pave the way for effective measures that address carbon leakage while safeguarding the interests of developing nations.

For greater insights into the impacts of CBAMs and the policy recommendations, access the full policy brief on T20 India’s website.

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