Border carbon taxes poised to shut out lower income nations

Washington D.C. Correspondent
Flags of developing countries over a picture of the Earth on one side and pennies cut to look like Pacmen surround a smokestack on the other.
Illustration by Samson Awosan.

Lower income countries are set to be hit hardest by border carbon taxes as they grapple with broader economic challenges and face hurdles ramping up cleaner technologies.

The European Union is launching the world’s first border carbon tax on certain high-emitting imports this October. Several wealthy nations, including Canada, Japan, the United Kingdom and the United States, are considering following suit.

If the U.S. and the EU, two of the world’s largest economies, adopt border carbon taxes to protect their domestic cleantech manufacturing industries, experts say many countries, especially those struggling economically, could lose access to crucial markets and be shut out of the energy transition.

Most middle and lower income countries, reeling from high fuel and food prices driven by the war in Ukraine, can already ill-afford the nearly $2 trillion in annual investments needed to fund their clean energy transition, according to the United Nations and the International Energy Agency.

Critics say it is also unfair for wealthier nations to saddle these countries with a border tax when those wealthy countries have yet to fulfill their promise of providing $100 billion a year in climate financing to lower income nations.

“EU’s border tax will end up penalizing poorer nations that are not responsible for the crisis in the first place and yet they have never been supported in making that just transition,” said Harjeet Singh, head of global political strategy with the Climate Action Network, a global web of environmental organizations.

The EU’s border tax could violate the 2015 Paris Climate Agreement’s principle of ensuring a just transition for all countries, critics say.

“I think what we’re in danger of doing in this transition to net zero is that we’re going to cut off poorer countries from the transition,” said David Luke, a professor at the London School of Economics and co-author of a recent study of the EU border tax plan.

A firm importing certain goods into the EU has two options. It can pay the tax and recover that expense by paying a lower price to the product manufacturer, often located in a poorer country. Or the firm can avoid the tax by finding a cleaner, potentially more expensive product made by a manufacturer in a country with higher environmental standards. Lower and middle income countries could lose revenue in the first scenario or market share in the second.

To avoid these fates, these nations could add more renewable energy, install carbon capture technology or make manufacturing more energy efficient. The first two measures are costly, requiring time and funds to scale up, which is far more difficult for poorer nations.

Another solution is to institute a domestic carbon price based on emissions, spurring companies to clean up manufacturing processes and energy systems.

Internal carbon prices often face political headwinds because they trigger higher energy costs at home. Nonetheless, some countries, including Brazil and Türkiye, are considering their own internal carbon prices, and others (Vietnam, Canada and the EU) have already established such programs.

The middle-income nations of South Africa, Brazil and Türkiye are most at risk from the EU tax, according to a February analysis by S&P Global Commodity Insights. The countries are susceptible because they export high volumes of iron and steel (key sectors facing the tax) to the bloc and do not yet have domestic carbon prices or comparable emissions controls to offset the EU tax.

In absolute terms, lower income countries won’t be too affected by the EU’s plan because they don’t export as much to the 27-member trading bloc as big economies like China or India, Michael Mehling, deputy director for the Massachusetts Institute of Technology’s Center for Energy and Environmental Policy Research, told Cipher.

Other experts note the small volumes these countries do send represent significant revenue for them. The smaller the economy, the larger the hit, LSE’s Luke argues.

Mozambique jumps out as a low-income country that could be hit hard because it is a major aluminum exporter to the EU, Luke told Cipher.

African nations collectively could lose up to $25 billion (nearly 1% of the continent’s GDP) a year from the tax, the LSE study found.

Although the EU said it intended to address the issue, its members couldn’t ultimately agree on a plan to assist low-income countries with border tax revenues, Luke said.

The three largest global emitters — China, the U.S. and India — also send lots of goods to the EU. China likely won‘t be much affected because it exports just about 6% of its steel and aluminum products, and the U.S. will potentially benefit because most of its goods are cleaner than the EU’s, a Climate Leadership Council analysis found.

The impact on India, which is moving towards adopting a domestic carbon tax of its own, is still unclear, said Natalie Janzow, senior associate at the nonprofit think tank RMI.

U.S. Senator Sheldon Whitehouse, a Democrat from Rhode Island, is including a provision in his proposed border carbon tax plan that would exclude the poorest countries, like Afghanistan and Benin, and provide funding and assistance to countries to clean up their manufacturing processes.

Last July, German Chancellor Olaf Scholz floated the idea of a climate club, where trading preference would be given to countries that have comparable carbon prices or controls and assistance would be given to countries willing to curb emissions.

However, this approach could become “discriminatory” if only some countries can participate in the market for clean products, cautioned Sameer Kwatra, India policy director at the Natural Resources Defense Council, an international environmental group.

If the U.S. Congress enacts a border carbon tax of its own, iron and steel would be two likely targets, given their carbon-intensive production processes. As with the EU border tax, a U.S. tax would likely most affect middle-income countries like Brazil, Vietnam and Türkiye.

Meanwhile, a complaint over the EU’s border carbon tax is expected to be filed with the World Trade Organization.

Whether it survives such a challenge depends on the intricate details of how it’s designed, said Xan Fishman, energy policy and carbon management director at the Bipartisan Policy Center.