Is the EU’s Carbon Border Adjustment Mechanism Fair to the Global South?
With much excitement, we are pleased to share the results of our latest research. In a joint study by the Centre for Econometrics and Applied Research (Ibadan) and the PEP – Partnership for Economic Policy for Economic Policy under the SPES Sustainability Performances, Evidence & Scenarios project, we analyze the economic implications of the EU’s Carbon Border Adjustment Mechanism (CBAM) on the Global South. Our research unpacks how the CBAM, indicated as carbon tax on specific goods imported into the European Union, affects the economies of the EU’s trading partners, particularly those in the Global South divide given that they are more susceptible to international shocks that could result from the policy.
Simulating that the impact of the carbon tax results in higher EU import prices via the global VAR framework, we find that the policy would dampen productivity and reduce external competitiveness in majority of the global south countries and the other EU trading partners, but we do not envisage higher inflationary pressures due to the policy.
We recommend caution in the implementation of the environmental policy to avoid unintended consequences on the partner economies. We propose that critical subsectors with low emission levels and small scale enterprises in low income and vulnerable regions of the Global South could be completely exempted or tempered with lower carbon tax rates to mitigate the adverse effects of the policy on macroeconomic outcomes of the countries. We also advise that the EU should continue to demonstrate its leadership role in shaping global climate action by facilitating global cooperation against climate change and also funding climate action programs especially in lower income countries with revenue recycled from the CBAM. This recycling scheme would help endear the acceptability of the EU climate policy internationally and to prevent retaliatory tariffs or trade wars from trading partners whose domestic and foreign competitiveness may be hampered by the carbon tax policy.
The working paper can be accessed through the following link: https://lnkd.in/dciuE2q6
RESEARCH CENTER