Trade Justice Movement                            CBM0016

Written evidence from the Trade Justice Movement

 

 

Background

 

  1. The Trade Justice Movement is a UK-wide network of sixty civil society organisations, with millions of individual members, calling for trade rules that work for people and planet. Our members include trade unions, NGOs, consumer groups and faith organisations. Together we are calling for trade justice, where the global system of trade ensures sustainable outcomes for ordinary people and the environment.
     
  2. A Carbon Border Adjustment Mechanism (CBAM) is a tax applied to imports which are deemed to be carbon intensive (normally in their production) and have not already been taxed through a carbon taxation system. The EU is introducing a CBAM with the aim of ensuring that certain imports face the same rates of taxation as they would if they were produced within the EU’s Emissions Trading Scheme (ETS). The UK, which has replaced the EU’s ETS with its own system, may follow suit and introduce its own CBAM.
     
  3. The US is also considering similar measures, while other countries including Russia and China are concerned about how the EU’s CBAM might affect their exports. A CBAM has been welcomed in principle by a number of countries. However, concerns have been raised by low-income countries, Russian and Chinese businesses, and international development organisations.
     

Trade and climate

 

  1. The UK Government claims to be a world-leader in the fight against climate change. The UK was the first major economy to set a carbon-zero target of 2050, an ambition which was recently increased to a 78% reduction in emissions by 2035 (compared to 1990 levels).[1] This year, the UK has the G7 Presidency and will host the COP26 Climate Conference in Glasgow, which hopes to build on the Paris Agreement to set new, ambitious targets for global emissions reduction.
     
  2. At the start of this administration’s time in office, in 2019, Prime Minister Boris Johnson pledged that his government would make Britain the “cleanest, greenest country on Earth”.[2] Since then the Government has announced investment in green technologies, regulations towards decarbonisation and the maintenance of high environmental standards after Brexit.[3] [4] Trade is also an area of ambition for this Government, since the UK regained competence for trade policy after the end of the Brexit transition period, in January 2021.
     
  3. However, we (along with many other civil society organisations and business groups) are concerned about a disconnect between the UK’s climate ambition and its new trade policy. The Department for International Trade (DIT) has been given free rein to negotiate new FTAs with countries which have far lower environmental standards than the UK, including the US, Australia and various countries in the Trans-Pacific bloc.[5] ‘Rollover’ FTAs with existing partners have not been reformed to account for climate change, and the Government refused to accept amendments to the Trade Bill which would have maintained high standards.[6]
     
  4. Notably, trade and investment policies are not covered by the Paris Climate Agreement, and, on the current trajectory, COP26 will not lead to a change of approach. The existing agreements do not require countries to make changes to their trade policy as part of their climate goals.[7]
     
  5. Furthermore, there are specific ways in which trade agreements can be damaging to the environment and hinder climate ambition. We are particularly concerned that, if not carefully designed, the following provisions could have negative impacts: Investor-to-State Dispute Settlement (ISDS), regulatory cooperation, production methods and standards (particularly in relation to food), WTO rules and restrictions on technology transfer.

 

The case for a CBAM

 

  1. While the UK has not announced any major policies to align trade and climate action, the EU has pushed ahead with a Carbon Border Adjustment Mechanism (CBAM). The reality of UK-EU trade means that the UK will have to make a decision about whether to introduce its own CBAM. This is made more pressing by the risk of the UK becoming a dumping ground for high-emission imports, such as steel, to avoid paying the EU carbon border tax.
     
  2. A CBAM is often considered to be a necessary part of a carbon taxation system, in order to ensure that imported goods face the same costs from using carbon-intensive methods of production as domestically produced goods. This has the effect of rewarding countries, companies and producers which use greener production methods, since they face lower costs. A further potential effect is (a) incentivising other producers to adopt lower-carbon methods of production, and (b) increasing the cost of carbon intensive goods, thereby encouraging consumers to seek greener alternatives.
     
  3. A CBAM aims to prevent ‘carbon leakage’, whereby carbon-intensive economic activity is moved abroad in order to avoid taxation or regulation. This can take the form of a company physically moving its operations to areas without carbon taxes or lower production regulations, or it can take the form of domestic companies losing business and being undercut by foreign producers which face different taxes and regulations. Either way, economic activity moves to areas without a carbon tax and more goods are produced with higher emissions. By taxing these imported goods in the same way that they would be taxed domestically, this loophole is closed. However, there is some debate about the extent to which carbon leakage exists and how well it can be measured.
     
  4. A particular issue with carbon leakage is that it allows wealthy countries to claim that they have low emissions without reducing their over-consumption. For example, if British steel manufacturing is relocated to India, this radically reduces UK emissions even if the same steel is bought back by UK car manufacturers and, ultimately, UK households who keep buying cars. Meanwhile, India’s emissions rise significantly despite the ‘consumption’ of cars taking place entirely in the UK.
     
  5. A CBAM could potentially reward countries which adopt greener production techniques and incentivise carbon transition. For example, if Chinese coal-powered steel production now faces an EU CBAM, this may encourage steel firms to use greener sources of energy production, or encourage the Chinese government to introduce or strengthen its own carbon taxation scheme. Similarly, if Indian steel is produced in a less carbon intensive way than Chinese steel, a CBAM would help make Indian steel producers become more competitive vis-a-vis Chinese firms in the EU market.


Risks of a CBAM

 

  1. A CBAM could hit developing countries particularly hard, especially those with high carbon emissions who also rely heavily on exports to the EU and UK. While their exports may make up a small proportion of the overall CBAM revenue, they may make up a high proportion of that country’s exports, and have drastic economic consequences.
     
  2. This disadvantage for developing producers seems particularly unjust in the context of historic relations between Global North and Global South: while Western European, North American and some East Asian countries were free to rapidly industrialise through carbon-intensive production (e.g. coal power in Victorian Britain), those same developed countries are now imposing taxes on fossil fuel-based production in the Global South. Furthermore, many developing countries liberalised their energy and manufacturing industries under pressure from Global North countries, whose ‘Washington Consensus’ ideology dictated the policies of the International Monetary Fund, World Bank and other institutions from the 1980s through to today (although some of this ‘consensus’ is now rightly being challenged). Part of this process was a shift in carbon-intensive production from the Global North to developing countries. These relations also contributed to many developing countries lacking the resources to shift to lower-carbon production.
     
  3. Although the EU’s CBAM currently only applies to particularly carbon-intensive goods, namely steel, other metals and energy production, it is possible that the CBAM will be extended in the future to other industries such as agriculture, manufactured goods or textiles. This could hit developing countries which have high rates of poverty, and could affect small-scale farmers. As with all taxes on products and corporations, it is important to ensure that the costs are not simply passed down to the most vulnerable, such as workers, or those producers at the bottom of supply chains.
     
  4. A CBAM could be implemented in isolation, without the appropriate flanking measures to ensure all countries are shouldering a fair level of responsibility for emissions and could eclipse other important climate policies, including policies related to trade. For instance, developed countries have delivered just 12% of the $100 billion in promised climate financing and the UK and the EU have been reluctant to move away from Investor-State Dispute Settlement (ISDS), which allows fossil fuel firms to challenge climate regulations that damage their profits. There is a risk that the trade and climate debate becomes dominated by CBAM, at the expense of other policy interventions. This would be particularly problematic if the CBAM did little to change overall emissions; at present there is little evidence that a CBAM would contribute to a significant shift in production processes. 

 

Conclusions

 

  1. TJM understands the necessity of a CBAM as part of a well-functioning domestic carbon tax. We recognise the concern about carbon leakage and would be interested to see if a well-targeted CBAM could help prevent leakage, and not allow the UK and other developed countries to get off the hook for climate emissions caused by domestic over-consumption of goods produced abroad. We believe that a CBAM should be part of a package of measures that will incentivise companies and countries to adopt greener methods of production, and reward those firms and countries who are already adopting greener practices by making them more competitive.
     
  2. However, we believe that a CBAM should not apply to low-income countries, for the reasons outlined earlier in this document. Developing countries often rely on fossil fuel production for their local economies, and lack the necessary technology to switch to greener alternatives. It should be recognised that countries in the Global North were allowed to develop through carbon intensive activities and that, if developing countries are to realise their own industrial strategies, they either need access to fossil fuels or to green technologies to avoid this. At the moment, developed countries produce the majority of new product designs for green technology and trade rules favour significant protection of those designs, creating a barrier to this kind of transition.
     
  3. We acknowledges that difficult conversations are ongoing about which countries should benefit from measures aimed at developing countries, however we believe that, at the very minimum, all countries covered by the Generalised System of Preferences scheme should be excluded from a CBAM and that steps should be taken to ensure rules of origin remain flexible enough to ensure that low income countries are not prevented from benefiting from preference schemes.
     
  4. We believe that a CBAM is not enough, and must not be used in isolation from other measures to tackle climate change: it would be entirely inappropriate for the UK to impose a measure that penalises third countries without living up to its commitments under the Paris Agreement, including on financing. Other provisions include: core standards protected in trade agreements with no regulatory cooperation on environmental standards; a complete departure from ISDS; reform to Intellectual Property and subsidy rules to aid green technology transfer; and full public and parliamentary scrutiny of trade agreements including meaningful impact assessments. We are concerned that a CBAM could dominate discussions on trade and climate at the expense of other more effective policies.
     
  5. We believe that a CBAM should be developed with full consultation of those affected; not just UK citizens, but also developing country voices including civil society. Ideally, a CBAM would be agreed multilaterally, and would not be solely a UK or EU policy. As part of the design of the CBAM, there should be a full assessment of how it might affect vulnerable workers, and who ends up bearing the brunt of the taxation. The methods for assessing carbon emissions in production should be made clear and open to challenge, ideally involving both civil society and academic experts.

 

October 2021


[1] Department for Business, Energy and Industrial Strategy, UK enshrines new target in law to slash emissions by 78% by 2035, 20 April 2021

[2] Energy Live News, Boris Johnson pledges to make Britain ‘cleanest, greenest country on Earth’, 13 December 2019

[3] Department for Business Energy and Industrial Strategy, £84 million boost for technology to power a green aviation revolution, 17 January 2021

[4] Department for Business Energy and Industrial Strategy, £11 million boost for energy entrepreneurs to turn green dreams into reality, 4 February 2021

[5] Trade Justice Movement, A US-UK trade deal: issues from a civil society perspective, June 2020

[6] Guardian, UK ministers gain power to allow lower-standard food imports, 19 January 2021

[7] The Commonwealth, The Trade Implications of the Paris COP21 Agreement, 2016