Carbon Border Adjustment of the EU: Different Perspectives from ASEAN, Japan, China and South Korea

Abstract

In this study, some comparisons were made by giving information about carbon pricing, carbon leakage emission trade systems and the new green deal of European Union (EU). A comparative study was conducted focusing on the perspective of Asian countries, with comments on the leadership of the European Union. The language of the article was written in English because the common article language used by the countries involved in the research was determined as English.

Keywords: climate change, carbon pricing, European Union, carbon leakage, emission mitigation.

Introduction

European Union (EU) have become the first one the answer and part to the UN Framework Convention on Climate Change (UNFCCC) and accepted the need for putting a solid greenhouse gas reduction mechanism for climate neutrality. Furthermore, to reach the world-wide goals to reduce global warming several actions have been proposed by EU and other countries (Parker & Karlsson, 2010).

As such, from an economic perspective, economists offered carbon pricing as the most cost-effective and effective regulatory approach which will relatively less undermine economic outcome of emission reduction actions. Carbon pricing simply works as an incentive to steer industries to take mitigation actions (Haites, 2018). On the other hand, a downside has appeared which is carbon leakage possibility. 

Regarding to the definition of European Union, the term means a situation of where businesses embrace laxer emission constraint behaviour, and the situation might have been observed much in energy-intensive industries (European Commission, 2015). In agreement with all this, although European Union (EU) have undertaken the role, there are still some parts to question and clarify from the perspective of other countries in the scope of a few issues in addition to leadership of European Union (EU) (Parker & Karlsson, 2010). 

1. What is Climate Neutral Country/Region?

Climate neutrality is a term which introduced to mitigate all greenhouse gases (GHGs), not only just carbon dioxide (CO2). The main idea to achieve neutrality is balancing so that they will be equal or less than the emissions (Guillard, 2021) as in the Equation 1 (Eq.1.): 

(Any) Gross GHG Emissions Produced – (Any) GHG Emissions Absorbed and/or Offset = 0 (Eq.1.) (Guillard, 2021).

Carbon neutrality, which is also a breakthrough action, solely undermines carbon as a gas. However, the climate neutrality covers all gases defined by Kyoto Protocol:

• Water Vapour (H₂O)
• Nitrous oxide (N2O)
• Methane (CH4)
• Ozone (O3)
• Some Halocarbons (such as CFCs, HCFCs, HFCs and PFCs) (Guillard, 2021).

To reach aforementioned zero emission, a lot of action has to be taken and the necessary actions are not solely costless. For instance, regarding an estimation of the Committee on Climate Change, by 2050, reaching net zero emissions could cause 1-2% change in overall GDP in UK. Hence, a common path to mitigate carbon emissions, efficient mechanisms should be followed. Economic theory recommends following the path of carbon pricing instruments such as emission trading systems and carbon taxes. 

However, with embracing this mechanisms, an occurrence called carbon leakage emerges. In addition to this, most of the countries have different perspectives since Emission Trade System differs from each other (Arimura et al., 2021)

2. Carbon Pricing, Carbon Trading and Carbon Leakage

Carbon pricing is a significant procedure to reduce emissions and reaching the climate change mitigation goals through putting a monetary value on carbon emissions. 

There are two types of carbon pricing. 

1. Emission Trading Systems (ETS): General state of mind that shapes the ETS is creating a market price for greenhouse gases (GSGs). 
2. It is also called cap-and-trade system since it limits up the total level of greenhouse gas emissions while giving permission to the industries with low emissions to sell their extra allowances to larger emitters (Bank, 2020).
3. Carbon Tax: This method sets a direct price of carbon through determining a tax rate on greenhouse emissions. A common method is applying this price mostly on carbon content of fossil fuels (Bank, 2020). 

Table 1: Difference between ETS and Carbon Tax (Bank, 2020)

• There might be also other ‘indirect’ methods of pricing carbon such as fuel taxes and regulations- social cost of carbon (Bank, 2020).

3. The EU’s Climate Change Leadership

Leadership type of the EU have often relied on directional leadership which is taking unilateral action and based on the outcomes of demonstration effect. It relies on being the first move in a policy, act and value to prove its feasibility to some extent (Parker & Karlsson, 2010).

Although this goals were leaded by the European Union, the carbon leakage danger has existed for every country (Haites, 2018). 

Carbon leakage undermines the action of reducing emissions and sabotages reaching the global sustainable development goals. Therefore, with the global effects of climate change, there is no point of reducing emissions in a domestic policy later results in negative global effect (Ismer et al., 2020).

To resolve this risk, carbon border adjustment mechanism is introduced. Carbon border adjustments are a series of alternative measures embroidered beneath Green Deal.

 These measures are going to be primarily applied on basic supply mechanisms such as cement, and steel. The objective behind these acts is mainly preventing carbon leakage and also transitioning smoothly to climate neutrality (Ismer et al., 2020). Although these supply mechanisms are fundamental to world economics one of the biggest sources of emissions such as international shipping is not accounted (Lee et al., 2013). 

When it comes down to economy and climate change, the simplest action can turn to a carbon trade wars therefore, although the EU occupy a place of leader; an hardworking leader indeed (Parker & Karlsson, 2010), an absence of intergovernmental forum raises the debates about which from should be followed and which existing regime is better and able to resolve tensions in both climate change and economics, and therefore should prevail (Cernicky et al., 2021). 

4. Carbon Border Adjustment Mechanism (CBAM)

Carbon border adjustment mechanism can be perceived as a genuinely friendly tool at first sight. An ensuring policy where every state is responsible for their emissions and have adopted carbon pricing policies to regulate those mission where there is also no allowance for less mitigation effort. However, during pandemic case, there have been observations of the adjustment mechanism is much more protectionist than solely a mitigation project. Although the fundamental goal is not aforementioned, trade partners can perceive it motive as a trade border rather than a carbon border. In the scope of the European Union, they should be on await for a similar upbraiding since majority of the trade partners are countries such as China, Japan and India (Cernicky et al., 2021).

Almost every country is now getting ready to introduce their carbon pricing systems individually as a mechanism. Despite these will probably result in emission reduction in the country-scale it is not assured that each one of them will adhere to a given a medium-term agreement lo global-carbon emissions. Although the emission trade system creates a greater outcome, still a common agreement is an issue (Wittneben, 2009). 

Without finding a way to emerge other entities whether it is a subnational community such as State of California, a regional community European Union or a nationwide system such as in Japan and Korea cases, the systems will cause fragmentation and this further might jeopardize world economy- which directly will affect global climate change actions which have already taken (Cernicky et al., 2021). 

Therefore, an effective carbon border adjustment mechanism should be established both including every single economy I the pedestal of trade system ad also should cover the products of sectors which might be under the huge risk of carbon leakage (Kuik & Hofkes, 2010). 

With putting carbon border adjustments right, Emission Trade Scheme might be re-evaluated and reformed (Ismer et al., 2020). 

For the anti-leakage policies and actions, trade mechanisms of countries should be involved in the emission trade system one by one, and they have to work on measures alongside with the European Union (Monjon, 2011). 

The industries who are most likely to cause carbon leakage are determined by United Kingdom (UK) which are under the European Union Emission trade System (EU-ETS) (Kuik & Hofkes, 2010). Such as, cement, steel form blast of oxygen furnaces ad aluminium carbon intensive products (Burke et al., 2021). However, it is also stated that a few just exposed to carbon-leakage under this emission trade system (Kuik & Hofkes, 2010). 

Since a CBAM based solely on the simplification of “one size fits all” policy which rules in some degree counter to the economic logic root of the use of carbon pricing to combat climate change. One of the defaults is clean producers get overcharged compared with high-carbon rivals. And the other is the only way for a non-EU emission producer to reduce its carbon costs is to reduce its sales to the EU-which is a convulsive situation (Mehling & Ritz, 2020).

On the other hand, if the coefficient which is multiplied with the import products to calculate overall carbon emission tax, the border adjustment measure based on foreign emission coefficients would offer the largest reduction in leakage, but the more practical measure that would use the EU coefficients would offer less (Kuik & Hofkes, 2010). Hence, the European Union (EU) might indicate practical way out of the climate crisis, but the feasibility in every case should be propel investigated to make actions also environmentally effective (Zachmann & McWilliams, 2020). 

Since from an environmental point of view border tax adjustments are not mainly focusing on the considerations of environment but industrial competitiveness although they help leading a low CO2 path (Kuik & Hofkes, 2010).

In the case of ASEAN, according to the policy simulations, with any variant (except from Vietnam case) reduction in emissions is visible. However, this reduction contracts the GDP of the country in return as well as the household income. 

Regarding to the same policy simulation, the interesting yet predictable outcome is, the reduction has different impact on every country in ASEAN, so if truth be known, it is much more challenging for ASEAN to build and form a carbon adjustment mechanism that covers a base for carbon pricing mechanism of every country. While having a diverse effect on Indonesia, in Malaysia and Singapore the exhibition of a similar pattern can be witnessed which is the complete opposite of Indonesia case (Nurdianto, 2010).

5. Japan, China and South Korea

Emission trade system were also started to apply in other Asian countries such as China, Japan and South Korea. For China case, they implemented this emission trade systems to their power sector at the very initial stage of mechanism.

Tokyo also (decided regionally) was the first one who implemented the cap-trade system to their commercial buildings. Furthermore, it is uniquely financial sector restricting. 

In Japan there is also Siatama emission trade system which is voluntarily by nature- which means no financial incentive or penalty exists to regulate the system. The Korean emission trade system is the first nation-wide cap-trade system applied in Asia. However, despite these movements have taken place in Asia, Japan has not been able to adopt a nation-wide emission trade system for several reasons such as taking backlash from energy- intensive sectors and the voluntary approach dominates the mitigation effort in Japan as well (Arimura et al., 2021). 

For the same reason why every country timidly accepting the carbon pricing, Japan and South Korea also suffers. Moreover, a sceptical perception is still existing when emission trade system debates are carried out such as stating the economic theory have not proved the remarkable outcome of these trade systems. Some others also oppose indicating the inequality in the scope of mitigation burdens. Countries such as South Korea have been trying to solve these problems by outing other frameworks and policies including strategies directly for making cap-trade system function and also maintaining the economy (Oh et al., 2017; Mehling and Ritz, 2020).

Within the frame of carbon border adjustments and Japan, there is no clear identification of what Japan quantifiably explains carbon border adjustment, there are such types as import tariff adjustments and also for the carbon pricing adjustment for exported products from Japan. A solid and profound based adjustment statement is yet to come (Takeda, 2012). For countries such Japan, China and South Korea, the shipping mitigations and the cost of emissions caused by international shipping seems to the most problematic scenario. Although EU-ETS have proposed an improvement in international cargo airplanes, firstly they are also sources of emissions, and secondly, the shipping from across the world cannot be stopped suddenly in terms of economic reasons (Lee et al., 2013). 

Thus, any kind of carbon border adjustment to be proposed to cover the global scale, must include feasible and smooth transition of the global shipping economy to other alternatives, some of the countries such as China, Japan and South Korea are ready to launch a thought on an agreement although it is not ensured whether it would be a complete gathering of these. 

However, every country who has a markedly significant place in international shipping would only accept an adjustment that covers under the aforementioned condition (Lee et al., 2013; Hewitt, 2012).

Conclusion

As a result, the need for a carbon border adjustment application is undeniably true. However, the arrangements to be made, from the carbon coefficient to the covered industries, are offered to reach a common agreement in a way that the economies of the countries in the trade system are taken into account. In this way, climate change targets can be achieved without economic discrimination and without building a wall on Asian industries.

Gökçe Nur AYAZ

European Studies Internship Program

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