A European Union plan to impose tariffs on high-carbon imports could hurt developing countries in Asia but is unlikely to lead to big reductions in greenhouse gas emissions, the Asian Development Bank (ADB) said in a report published on Monday, February 26.
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A European Union plan to impose tariffs on high-carbon imports could hurt developing countries in Asia but is unlikely to lead to big reductions in greenhouse gas emissions, the Asian Development Bank (ADB) said in a report published on Monday.

The Carbon Border Adjustment Mechanism (CBAM) was introduced to address concerns that the outsourcing of manufacturing had put large parts of the EU’s supply chain beyond the reach of its emissions trading scheme (ETS), a situation described as “carbon leakage”.

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It was designed to level the playing field and make foreign suppliers pay the same carbon price as domestic ones, even if they are not subject to an ETS or carbon tax at home.

ADB said CBAM was expected to cut Asian exports to the EU, particularly from western and southwestern Asia, with steel from India also likely to take a hit.

But any small reduction in emissions would quickly be offset by the continuing increase in carbon-intensive production throughout Asia, and mechanisms to share emission reduction technology would be more effective, it said.

“It’s actually a relatively limited policy at the moment,” said Neil Foster-McGregor, ADB’s senior economist. “It only imports into the EU (and) only covers six sectors.

“The way the scale of production is increasing, even if we do this carbon pricing more broadly across the globe, you’re still going to see rising emissions unless we see a fundamental change in production techniques,” he added.

CBAM could raise around 14 billion euros ($15.2 billion) in revenue by 2030, and the proceeds should be used to provide climate finance for developing countries to decarbonise manufacturing, Mr. Foster-McGregor said.

One of the aims of CBAM was to incentivise non-EU economies to impose stricter climate policies of their own: if exporting nations can demonstrate that a carbon price has already been paid, the CBAM levy will be reduced.

India has already discussed the possibility of imposing export taxes on CBAM-covered products sold to Europe, and China is expanding its ETS to cover exporting sectors like steel.

Both countries have been critical of CBAM, with China warning Europe not to use climate as an excuse to engage in trade protectionism.

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While CBAM serves as a tariff on foreign producers, it will also raise the cost of raw materials such as steel and fertiliser for downstream EU manufacturers, and could even give them an incentive to relocate more production capacity overseas, including Asia, the ADB report warned.

“While there is a partial offsetting of the carbon leakage in the upstream, there could be new carbon leakage downstream in the EU … They are shooting themselves in the foot,” said Jong Woo Kang, another senior ADB economist, speaking at a briefing on Monday. )

 The Bank expects growth to be propelled by “robust domestic consumption as consumer confidence improves, and by investment including large increases” in government capital expenditure. File.
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The Asian Development Bank (ADB) on September 20 pared its growth forecast for India’s economy to 6.3% for this year, from 6.4% estimated earlier, citing the impact of falling exports and erratic rainfall patterns that could hit farm output. 

The Bank’s economists also raised their inflation forecast for the year to 5.5% from 5% estimated in April and retained their real GDP growth projection for 2024-25 at 6.7%, influenced by expectations that private investment and industrial output will rise. 

Noting that the economy displayed robust growth of 7.8% in the first quarter of this fiscal year despite global uncertainties, the Bank expects growth to be propelled by “robust domestic consumption as consumer confidence improves, and by investment including large increases” in government capital expenditure through the rest of this year and next year. 

“However, as slowing exports could foment headwinds for the economy, and erratic rainfall patterns are likely to undermine agricultural output, the growth forecast for this year is revised down marginally to 6.3%,” noted the Bank’s Asian Development Outlook update.    

“Monsoon rainfall under the influence of a developing El Niño has led to erratic weather patterns, including flooding in certain regions and deficient rains, particularly in August. The erratic rainfall patterns have resulted in damage to the rice crop in particular and lower sowing for pulses in the kharif season,” the update pointed out, adding that it has slashed its farm sector growth hopes for the year by almost one percentage point.   

The ADB is upbeat on investment prospects in the economy, despite a decline in net foreign direct investment flows in the first quarter to $5 billion from $13.4 billion last year. 

Rana Hasan, the Bank’s regional economic advisor for South Asia, said that investments are currently driven in a big way by the central government’s capex push, but the latest quarter’s numbers show that States have also ramped up investments by 78%. “Moreover, signs of private capex can be gauged from the 19% growth in bank credit in the first quarter with a decline in banks’ non-performing loans, and an uptick in capacity utilisation rates in several industries with a better policy environment for manufacturing,” he said.