Border carbon adjustment is inherently imperfect. But it’s not evil.
Aaron Cosbey
September 20, 2020
Dr. Arvind P. Ravikumar argues in an MIT Technology Review Opinion (Carbon Border Taxes are Unjust, July 27, 2020) that, given the context in which it’s proposed – current and historical North-South dynamics – border carbon adjustment (BCA) is a hypocritical policy option for developed countries. It’s an important critique to address, given that the EU looks serious about adopting BCA, and all currently proposed climate policy legislation in the US includes some version of it.
I would be the first to agree that BCA is a highly imperfect tool, and that the particulars of its construction can make it manifest in many forms, including as an odious tool for protectionism. But I disagree with most of Dr. Ravikumar’s points.
The influence of multilateral development banks
Dr. Ravikumar argues that it’s hypocritical for developed countries to levy charges based on carbon intensity on exports from developing countries, given that they pushed fossil fuel infrastructure on those same developing countries, via funding from institutions such as the World Bank (and, presumably, IFC and MIGA).
It’s true that some of those deals may have involved a push by lenders, but it’s important to note that pull was a major factor. That is, the developing country recipients lobbied heavily to get that lending; it was not “pushed” at unwilling targets. Moreover, most of the countries that are proposing BCA are those that have for years supported changes to Bank policy in this area.
The standards for support have changed. The World Bank no longer directly supports coal-fired generating plants and has ramped up clean energy funding. Even if there may be loopholes via subsidiaries, and some legacy fossil fuel funding, and even if clean energy funding is insufficient, this is a big deal. As an aside, the Bank and those supporting this change were accused of eco-imperialism over the matter, so it seems they are damned either way.
Those countries proposing BCA also have massive legacy fossil fuel infrastructure. Most are taking active and costly steps to transition (see the EU Green Deal). The point of BCA is explicitly to allow those countries’ transition policies to actually work, and allow the short-term pain to actually be felt by their domestic consumers.
The influence of rich country extractive investment
He argues it’s hypocritical for developed countries to impose BCAs, given that extractive industries based in developed countries are investing in fossil-fuel intensive operations in developing countries, aggravating their GHG-intensive economic profile.
This has little to do with developed country policy. Developed countries can’t be held responsible for making developing countries more GHG-intensive if the vector is private sector investment.
Any extractive sector investor with plans to export to high-climate ambition countries who didn’t take into account the possibility of GHG-based import standards did not perform due diligence.
Greenfield investment (at least by the majors) in these sectors in developed and developing countries tends to be highly efficient, mostly for simple cost reasons, but also with a view to future climate regulations.
The influence of globalization, and outsourcing carbon intensity
He argues that it’s hypocritical for developed countries to impose BCAs, given that the forces of globalization have worked actively to effect outsourcing from developed to developing countries, ensuring that the latter have the lion’s share of emissions intensity.
Again, it’s wrong to suggest that this was somehow a dynamic planned by the same governments that are now proposing BCA. In fact those governments are highly concerned about that outsourcing trend, but could do little to stop it. BCAs are actually an attempt to do so.
The hypocrisy of caring for selected poor
He charges that American policy makers see the inequity of imposing the costs of BCA on low-income US citizens, but have no qualms about imposing them on developing country citizens.
I have never seen a BCA proposal that sought to somehow shelter low-income domestic citizens from its impacts. In fact, as noted above, BCA is about ensuring that citizens in the implementing jurisdiction do feel the costs. The most painless action for low-income domestic consumers would be to allow low-cost high-carbon imports to undercut domestic producers.
The hypocrisy of caring about selected protectionism
He notes that the US took India to WTO dispute settlement over its National Solar Mission on the grounds that it was conditioned on local content requirements. He argues that it’s hypocritical to object to one kind of protectionism (i.e., local content requirements) and favour another (i.e., BCA).
The Indian policy wasn’t so much protectionism as it was industrial policy.
It was definitely hypocritical of the US to take that action in the WTO when many local content requirements of the same type existed at the state level in the US, and when the US pursues aggressive buy-USA policies for government procurement.
I agree with Dr. Ravikumar’s argument that developing countries should be allowed by the WTO to pursue this sort of green industrial policy (though the details of how to make that work are not straightforward).
But comparing those kinds of policies to BCA is comparing apples to oranges. BCA is neither protectionism nor industrial policy. Yes, it does protect domestic industries against low-cost imports. But the low-cost advantage in question only exists in the first place because the implementing countries have boosted the costs of domestic production through carbon pricing. BCA is not about imposing new costs on developing country imports to make them less competitive; that would be protectionism. Rather, it’s about blunting a cost disadvantage that countries have imposed on their own producers via carbon pricing.
BCA as neo-colonialism
He charges that BCA is a continuation of colonial practices of wealth transfer from developing to developed countries.
It is nothing of the sort. Colonial wealth transfer was forced, enacted with violent means, and carried out with the intent of enriching the perpetrators. There’s nothing forced about payment of BCA levies. If a GHG-intensive producer chooses to export to a BCA implementing country, it will be charged a levy. Most BCA proposals would allow low-carbon foreign producers to avoid the levy. And the overall intent is not about further enriching the rich implementers – it’s about allowing costly global leadership on an issue that, if left unaddressed, visits its hardest impacts on the poor and marginalized in developing countries.
Truly equitable climate policy
He argues that an equitable climate policy should focus on developing low-carbon capacity in developing countries rather than punishing them with measures like BCA.
I strongly agree that developed countries have a duty to help build such capacity in developing countries, given that they got rich by burning so many fossil fuels that developing countries can’t now follow the same development path. This is both a moral and a legal obligation, enshrined in the UNFCCC and the Paris Agreement.
But for the same reasons they also have moral and legal obligations to lead on mitigating climate change. We can all agree that leadership does not involve making one’s domestic producers so uncompetitive that they relocate their emissions to low-ambition countries. BCA is a tool (albeit imperfect) that aims to allow for real leadership.
Many pundits, myself included, argue that the revenues from BCA should be devoted to international funds that seek exactly the goals described above: greater capacity for low-carbon production in developing countries.
In closing
To be clear: I am not a salesman for BCA. Like any tool, BCA has strengths and weaknesses, and for years I have been dogged in exploring both equally. I offer the comments above in that spirit, and hope they’ll be helpful in advancing our policy debates on a critically important subject.
Aaron Cosbey is a policy analyst with 29 years of experience on trade and sustainable development. He is a Senior Associate at the International Institute for Sustainable Development, at the European Roundtable on Climate Change and Sustainable Transition, and at the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development. The opinions in this article are his own.