International trade and climate change: border adjustment measures and developing countries

In the wake of the failure of the Copenhagen climate talks, carbon border adjustment measures are gaining momentum both in the European Union (EU) and in the United States (US). Observers regard it as politically inevitable that trade measures will be a necessary requirement for US climate legislation to pass the House of Representatives and the Senate. Border adjustments are trade measures that seek to level the playing field between domestic producers, who are faced with costly climate change policies, and foreign producers, who are faced with none or very few. There are three design options: the imposition of a tax equalising the costs that climate policies generate for domestic producers, compulsory acquisition of emission allowances when the relevant goods are imported or tax rebates when these goods are exported. The most important target economies of border adjustments are big emitters like China, India and South Korea. But the risk is that energy- and emission-intensive sectors in low-income countries (LICs) may end up being caught in the crossfire. An analysis of the potential economic impact of border adjustments on developing countries with a special focus on LICs identifies Mozambique and Tajikistan as the LICs most vulnerable to EU border adjustments and Tajikistan and Zimbabwe as those most exposed to US border adjustments. The current debate neglects the impact of border adjustments on the situation of poor countries in the multilateral trading system, even though LICs are especially exposed to changes in trade policy, in particular when their exports are highly concentrated in only a small number of commodities. Thus, from a development perspective, border adjustments should be regarded with caution. Moreover, border adjustments are contested in terms of their uncertain environmental effectiveness, their practical feasibility, their questionable legality and their negative implications for the multilateral climate and trade regimes. The following policy actions are therefore recommended: • Efforts to agree on a post-2012 agreement should be further strengthened: a legally binding global climate deal with full coverage and participation would reduce the political pressure in favour of border adjustments. • In light of the likelihood that border adjustments will be included in domestic climate legislation in developed countries, an independent body should articulate a set of multilateral guidelines to limit the use of such measures. The guidelines should, for example, call for transparency, predictability and consistency in their deployment in order to ensure that domestic implementation is consistent with the objectives of the United Nations Framework Convention on Climate Change (UNFCCC) and the World Trade Organization (WTO). • If border adjustments are in fact enacted, products from Least Developed Countries (LDCs) and countries responsible for a de minimis level of global greenhouse gas emissions should be exempted from border adjustments. • Accompanying assistance measures should be put in place for vulnerable developing countries, above all for LICs that are not classified as LDCs. • The proceeds from border adjustment measures should be used to assist affected lower-income countries to cut back on the carbon intensity of their economies.