First, I deeply apologize for being this inactive past month. Me and my family have been through some health problems therefore I was not able to share articles on time. However, I will be catching up with the forum pretty quickly.

Carbon Neutrality and Different Perspectives on Carbon Border Adjustment Systems

Currently, when terms such as carbon neutrality, environmental deals and conventions are thought, EU is the one organization which comes to our mind. It is because that European Union (EU) have become the first one the answer and part to 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 CITATION CHA10 l 1055 (Charles F. Parker, 2010).

Before mentioning about concepts such as carbon pricing and carbon trading, what is carbon neutrality and why is it important?

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 CITATION Elo21 l 1055 (Guillard, 2021) as in the Equation 1 (Eq.1.):

(Any) Gross GHG Emissions Produced – (Any) GHG Emissions Absorbed and/or Offset = 0 (Eq.1.) CITATION Elo21 l 1055 (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) CITATION Elo21 l 1055 (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.There are several approaches to these methods from economic theory perspective, social perspective and environmental perspective.

An observed downside of these mitigation mechanisms (such as carbon pricing) is the occurring of the term called ‘carbon leakage’.

Carbon leakage is although a country is following the climate trends for its own borders, it may affect another country which the production of emission gases is transported which overall increases their total emission.

Therefore, an effective carbon border adjustment mechanism should be established both including every single economy in the pedestal of trade system ad also should cover the products of sectors which might be under the huge risk of carbon leakage CITATION Onn10 l 1055 (Onno Kuik, 2010).

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). 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 CITATION Wor20 l 1055 (Bank, 2020).

2.      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 CITATION Wor20 l 1055 (Bank, 2020).

Figure 1.Carbon Economy

Although 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 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 CITATION DrJ21 l 1055 (Dr. Jen Cernicky, 2021).

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 CITATION Mic20 l 1055 (Ritz, 2020).

 Figure 2. Carbon in Different Industries

For instance, 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 CITATION Tsu13 l 1055 (Tsung-Chen Lee, 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 CITATION Tsu13 l 1055 (Tsung-Chen Lee, 2013) & CITATION Hew12 l 1055 (Hewitt, 2012)

References

Bank, W. (2020). Pricing Carbon. Retrieved from The World Bank: https://www.worldbank.org/en/programs/pricing-carbon

Charles F. Parker, C. K. (2010). Climate Change and the European Union’s Leadership Moment: An Inconvenient Truth? Journal of Common Market Studies, 923-943.

Dr. Jen Cernicky, R. M.-O. (2021). Avoiding a Carbon Trade War. G20 Dialogue and Coordination and the European Carbon Border Adjustment Mechanism (CBAM), (pp. 1-8).

Guillard, E. (2021, April 22). Carbon Neutrality or Climate Neutrality: What is the difference? (CIRIDD) Retrieved August 24, 2021, from https://www.construction21.org/articles/h/carbon-neutrality-or-climate-neutrality-what-is-the-difference.html

Hewitt, G. (2012). Is corporate Asia ready for the green economy? ACCOUNTANTS FOR BUSINESS.

Onno Kuik, M. H. (2010). Border adjustment for European emissions trading:Competitiveness and carbon leakage. Energy Policy, 1741-1748.

Ritz, M. A. (2020). Going beyond default intensities in an EU carbon border adjustment mechanism. Cambridge Working Paper in Economics, 1-23.

Tsung-Chen Lee, Y.-T. C. (2013). Economy-wide impact analysis of a carbon tax on international container shipping. Transportation Research Part A, 87-102.

Thank you so much!