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Carbon border taxes: What are their implications for developing countries?

Global action on climate change has been slow. In 2015, signatories to the Paris Agreement decided to limit temperature rises to less than 2 degrees Celsius…

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This article was originally published by Brookings

By Elena Ianchovichina, Harun Onder

Global action on climate change has been slow. In 2015, signatories to the Paris Agreement decided to limit temperature rises to less than 2 degrees Celsius above preindustrial levels by bringing emissions to net zero by the second half of the century. In February 2021, an initial assessment covering 40 percent of the signatories to the agreement has shown little progress.

With voluntary actions stalling, in July 2021, the European Union (EU) proposed a comprehensive plan to boost climate change mitigation efforts. The plan includes a Carbon Border Adjustment Mechanism (CBAM), which aims to equalize the fees on the carbon content of goods in the EU regardless of where they were produced by imposing carbon border taxes. The proposal initially covers cement, iron and steel, aluminum, fertilizers, and electricity; any carbon fees already paid at the source will be deducted.

The proposed CBAM could help alleviate “leakage.” When emissions are restricted in the home country, for example by cap-and-trade mechanisms, firms can relocate production to other countries to avoid restrictions—giving rise to pollution havens. Consumers in the home country can then buy cheaper, carbon-tax-free imports rather than the more expensive domestic alternatives. The fact that most high-income countries have become net importers of CO2 while most developing economies are net exporters indicates that leakage is a serious problem. Carbon border taxes can suppress this effect by effectively equalizing carbon prices for domestic and foreign producers in the home market.

Effects on emissions in developing countries

Although developing countries may gain significantly from global mitigation efforts in the long run, given their greater exposure to climate risks, in the short run they may have little incentive to undertake costly emission reductions. Can the CBAM incentivize them to comply? To answer this question, we use a simple hypothetical example (Figure 1), adopted from Mattoo et.al. (2012).

We consider a world with two economies: an advanced one (identified with *) and a developing one. Without carbon pricing, each country produces until the marginal value of its good drops to zero (the price of emissions). Thus, in the initial equilibrium, the advanced country emits O* E0, the developing country emits OE0, and the total value of production by the advanced and developing countries are respectively given by the triangles A* O* E0 and AOE0.

Figure 1. Carbon price: Compliance vs. noncompliance

Notes: Solid lines show the value of the marginal product of emissions in advanced (black) and developing (blue) economies. The areas under the curves show the total value of production.
Source: Authors.

Suppose the advanced country imposes a carbon price, p*1, which reduces its emissions to O* E*1 and output to the trapezoid A* O* E*1 C*. The developing country has a choice: either comply and implement the same carbon price domestically or face a tariff at the border that is equivalent to p*1. In the case of a domestic carbon price, the developing country’s emissions decline to OE1 and its output shrinks to the trapezoid AOE1C. If it faces a border tariff, emissions reduce to OE2 and its output to the triangle BOE2. Importantly, unless the advanced country has complete market power, the price of the developing country good would drop by an amount (p2), which is smaller than the emissions tariff (p1).

Which policy would the developing country prefer? That depends on a comparison of the area of the triangle (BOE2) and that of the trapezoid (AOE1C), which cannot be done without data. Compliance is more likely when the developing country is less carbon intensive (larger A), the carbon price is lower (smaller p*1, and/or the developing country absorbs a larger share of the tariff burden (higher p2), as in the case of a small commodity exporter selling an undifferentiated product.

In this single-sector example, border taxes reduce emissions in the developing country in both cases, and especially in compliance through a scale effect. There are, however, other forces at play. If exports are more carbon intensive than other sectors in the developing country, then CBAM can shift resources to cleaner sectors, further reducing emissions through a composition effect. If exports are less carbon intensive than other sectors, carbon prices can shift resources toward more polluting sectors, leading to an increase in emissions. Finally, a lower level of trade with advanced economies may reduce access to cleaner technologies, slowing down the transition out of dirty industries. Overall, the net impact on emissions will vary across countries.

Ethics and politics

For some countries pricing the carbon domestically, and avoiding the border taxes, may be the least costly option. This, however, can prompt objections on ethical or political grounds.

The bulk of total greenhouse gas (GHG) emissions to date was produced by advanced economies. Yet, as illustrated in the example above, with less efficient economies (A<A*), a common carbon price is likely to burden developing economies more than advanced economies. Moreover, developing country constituents may also be less willing to pay for climate. Some research suggests that better environment and climate may be luxury goods—that is, the willingness to pay for them is considerably lower at low-income levels. If true, developing countries may face greater political resistance against carbon emission regulations.

These concerns can be reduced by a more nuanced and targeted implementation of carbon pricing and border taxes. But finding and implementing the “right” carbon price differentiated by country, product, and industry is a notoriously difficult task. When a Ford is made in the United States, only 40 percent of its parts are produced in the USA or Canada. The rest come from different countries around the world. Identifying the country of origin for millions of parts, and then verifying the true carbon content in each stage of processing, is a massive undertaking.

Complementary policies for border taxes

Transfers from advanced to developing countries can help distribute more equitably the burden of carbon border taxes across countries. However, with weak institutional structures in many developing countries, simply putting more cash transfers and nothing else on the table is unlikely to ensure positive economic and climate outcomes. The solution lies in aligning trade, climate, and domestic policies. This is a difficult task, but the following steps can help.

  • Make the CBAM “protection-neutral” for developing countries. Border taxes should focus on making carbon emissions more costly by changing relative prices and should not be used for erecting protectionist barriers. This can be achieved by an equivalent reduction in other (tariff or nontariff) trade barriers, especially for cleaner sectors, products, or firms.
  • Make clean technologies more accessible for developing countries. Some suggest that technological innovations have done more to lift people out of destitution than development aid. Cell phones in Africa, mobile payment systems in Kenya, and solar panels in Yemen have shown that, with the right conditions, leapfrogging to cleaner technologies is possible. The CBAM can promote technology transfers in the “right” industries by changing relative prices in favor of cleaner technologies. Targeted technology transfer programs can go a long way toward strengthening this effect and complementing more conventional aid mechanisms.
  • Use all leverage to align domestic policies. Coordination failures among countries can lead to a “race to the bottom.” Energy subsidies give domestic producers a cost advantage that encourages the production of energy-intensive manufacturing. By contrast, in Latin America manufacturing producers are at a disadvantage due to expensive electricity despite the abundance of clean and cheap energy sources such as hydropower; the high price of electricity reflects inefficiencies in the domestic electricity distribution networks. The CBAM can help reduce such coordination failures by changing relative prices, but more needs to be done to eliminate domestic distortions, especially if too many countries remain noncompliant.

The proposed CBAM is a welcome game changer that can help boost climate change mitigation. To make it transformative, rather than punitive, and to avoid a bi-polar world with the rich and green countries and the poor and polluting ones trading primarily among themselves, more effort is needed to design a CBAM that works for all countries.



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Base Metals

Monsters of Rock: Lithium shares flush with positive sentiment to dominate the gains

Lithium miners were the kings, queens, jacks and aces of the bourse on an avalanche of positive news around the … Read More
The post Monsters of Rock:…

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Lithium miners were the kings, queens, jacks and aces of the bourse on an avalanche of positive news around the sector.

The biggest trigger was probably the incredible rise in value for Tesla overnight, which soared beyond a US$1 trillion valuation on news Hertz would order US$4 billion worth of electric vehicles from the automaker.

As the leading electric vehicle maker in the western world, and with a big presence also in China and energy storage, Tesla is one of the biggest end users of lithium products globally.

Its boss Elon Musk, now the richest man ever, has a fair bit of sway on the market as well.

On top of that Pilbara Minerals (ASX:PLS), up 525% over the past 12 months since spodumene prices bottomed out at under US$400/t (it sold a batch for upwards of US$2000/t last month), gained 7.66% after formally announcing plans to develop a lithium chemical plant in a JV with South Korea’s POSCO.

Core Lithium (ASX:CXO) declared the start of construction on its Finniss Lithium Mine in the Northern Territory. That will be shipping concentrate from the end of 2022.

$550 million capped Neometals (ASX:NMT) was up 14% after announcing its battery recycling demonstration plant in Hilcenbach, Germany, had been fully commissioned.

The one time lithium miner is up 405% over the past year.

Vulcan Energy (ASX:VUL), Sayona (ASX:SYA), Liontown (ASX:LTR) and Orocobre (ASX:ORE) were among the lithium miners to dine out on the day’s news, while rare earths miner Lynas (ASX:LYC) was also up.

On the flippity flip, iron ore miners were weak with Fortescue (ASX:FMG) and Rio Tinto (ASX:RIO) cancelling out a gain from BHP (ASX:BHP), while Mineral Resources (ASX:MIN) cancelled out the gains it made with yesterday’s announcement the Wodgina lithium mine would be coming back online with news it ate a 48% price discount on iron ore sales in the September Quarter.

MinRes’ average realised prices fell from US$178/t to around US$78/t between the June and September Quarters.

The bright green is all lithium baby. Pic: Commsec

 

Base metals inventories falling, but can it be sustained?

Base metals were back up on Monday, with production cuts in energy starved China and Europe hitting primary supply.

Inventories held by the major exchanges are being chewed up.

While price moves among the miners was muted, nickel rose 3.2% to climb back over US$20,000/t overnight after hitting US$21,000/t briefly last week.

“Nickel rallied after Eramet disclosed a 19% drop in ferronickel production from its operations in New Caledonia,” ANZ analysts said in a note.

“The market is also showing signs of tightness, with cash contracts closing at their biggest premium to futures in two years. LME inventories are down nearly 50% since April.”

LME stockpiles for copper hit their lowest level since 1974 last week, but Commbank analyst Vivek Dhar says it is too early to say whether the market is as tight as it seems, or whether some traders are hoarding to capitalise on high prices.

The market is expected to be in a small deficit at the end of this year to a 328,000t surplus in 2022 on rising supply (about 1.3% of global demand).

Mined supply is expected to increase 2.1% this year and 3.9% in 2022, but Dhar warned copper miners had a history of underwhelming.

“The rising forecasts for copper mine production reflect 5 major copper projects due to arrive by the end of 2022,” Dhar said.

“That compares with just two major copper projects in the last 4 years.

“Given the track record of mine disruptions (i.e. labour strikes, power and water scarcity and geopolitics) and the decline in copper grades, elevated copper mine production growth forecasts don’t tend to last long.

“We think it’s worth considering that new mine supply may take longer than currently expected to hit the market.”

The post Monsters of Rock: Lithium shares flush with positive sentiment to dominate the gains appeared first on Stockhead.







Author: Josh Chiat

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Energy & Critical Metals

Chart of the Day: Plenty of immediate upside targets for Ionic Rare Earths

Let’s get into it. Iconic Rare Earthss (ASX:IXR) is a bullish set up from a technical perspective. It’s in an … Read More
The post Chart of the Day:…

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Let’s get into it.

Iconic Rare Earthss (ASX:IXR) is a bullish set up from a technical perspective.

It’s in an uptrend. The moving averages are sloping up.

It’s shown us that when it wants to the market can get a hold of it – as evidenced by the fierce run from 1.5c to 6c at the start of this year.

 

Chart of the Day: Ionic Rare Earths (ASX:IXR)

There are no immediate gaps on the chart to worry about that need to be filled.

The company surpassed 4c resistance yesterday on increasing volume, which was a positive sign. However, after touching 4.5c in intra-day trade, it has now settled back to close at 4.2c, leaving a daily selling candle.

That infers that a test of 3.8 – 4c may be on the cards.

In our view that would make attractive buying.

Given the negative response to the scoping study in late April, there are plenty of immediate upside targets, the most immediate being 4.7c, with further potential to those March highs above 6c.

Back the other way, and we don’t need to hold this below 3.5c.

The company is well funded – reporting over $11m on balance sheet at their last quarterly – with an updated quarterly anticipated before the end of the month.

We are long as of yesterday, and will manage the trade to the above risk, looking for 4.7c first, with potential to above 6c if things go their way.

Steve Collette of Collette Capital Pty Ltd (ABN 56645766507) is a Corporate Authorised Representative (No. 1284431) of Sanlam Private Wealth (AFS License No. 337927), which only provides general advice.

Collette Capital only makes services available to professional and sophisticated investors as defined by the Corporations Act, Section (s)708(8)C and 761G(7)C.

The Collette Capital Wholesale IMA Strategy has returned +24.83% p.a. net of all fees as at the end of September 2021 since inception in January 2015 (using the Time Weighted Return method of calculating returns).

Learn more at www.collette.capital

The post Chart of the Day: Plenty of immediate upside targets for Ionic Rare Earths appeared first on Stockhead.


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Energy & Critical Metals

Hastings could be next in line to produce rare earths in Australia with plant approval in Onslow

Rare earths player Hastings Technology Metals (ASX:HAS) has just secured environmental approval for construction of the downstream processing plant at…

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Rare earths player Hastings Technology Metals (ASX:HAS) has just secured environmental approval for construction of the downstream processing plant at its Yangibana rare earths project in Onslow in WA.

It’s a solid step on the path to production, with the plant set to perform hydrometallurgical processing of rare earths oxide concentrate from Yangibana into mixed rare earth carbonate (MREC) containing high levels of neodymium and praseodymium concentrate (NdPr).

NdPr are vital components used to manufacture permanent magnets that are required in advanced technology products ranging from electric vehicles to wind turbines, robotics, medical applications and digital devices.

And Yangibana contains one of the most highly valued NdPr deposits in the world, with NdPr:TREO ratios of up to 52%.

Australia’s next rare earths producer?

The Department of Agriculture, Water and the Environment (DAWE) approval follows DevelopmentWA Board sign-off last month for the company to enter discussions for an option to lease Ashburton North Strategic Industrial Area (ANSIA) Lot 600.

“This is a significant milestone for our Yangibana Rare Earths Project and further endorses Hastings’ decision last year to decouple the processing plant from the Yangibana mine site,” executive chairman Charles Lew said.

“The Commonwealth environmental approval will allow Hastings to construct the Onslow Rare Earths Plant for a full production rate of 15,000 tonnes of MREC per annum, unlocking the high-quality and NdPr-rich rare earths carbonate that we will produce at Yangibana.”

“Importantly, the Commonwealth approval is another positive step in Hastings’ journey to become Australia’s next rare earth producer.”

“Debt financing talks are advancing well and scheduled for conclusion before the end of this year and early stage civil works at the Yangibana mine site are in progress.”

Pic: Location of ANSIA highlighting the site chosen for the Onslow rare earths plant.

Plant construction kicks off in 2022

The company says that building the plant at ANSIA – which is around 15kms south-west of Onslow – is key to its downstream processing program because it offers access to piped natural gas, a plentiful supply of water and grid power.

Plus, the ANSIA location reduced the volumes of consumables and reagents needed to be transported to the Yangibana mine site by up to 80%.

Construction of the plant is due to begin in 2022, after the completion of early works at Yangibana mine site – and in line with Hastings’ target to produce its first MREC in early 2024.

The post Hastings could be next in line to produce rare earths in Australia with plant approval in Onslow appeared first on Stockhead.




Author: Emma Davies

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