Carbon tax on developing countries: Can emerging economies afford to pay for their emissions?

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  Quantumrun Foresight
• November 27, 2023

Insight summary

The European Union's Carbon Border Adjustment Mechanism (CBAM) aims to level the carbon emissions playing field but could inadvertently penalize developing nations lacking the means for rapid decarbonization. With developed nations possibly gaining $2.5 billion in additional income from a carbon tax, developing countries could suffer a $5.9 billion loss, challenging their economic and market positions. This disparity challenges the principle of differentiated responsibilities in climate action, suggesting a need for tailored strategies that recognize varying capacities and development levels. The broader consequences for developing economies may include industry shrinkage, job losses, and a push toward regional collaboration for exemptions, alongside a potential influx of foreign support and investment in green technology.

Carbon tax on developing countries context

In July 2021, the European Union (EU) released a comprehensive strategy to accelerate the reduction of carbon emissions. The Carbon Border Adjustment Mechanism (CBAM) is an attempt to standardize carbon content pricing throughout the region regardless of where products are made by imposing border taxes. The proposed regulation first covers cement, iron and steel, aluminum, fertilizers, and electricity. While it seems like a good idea to tax corporations on any carbon emission contributed by their manufacturing and operating processes, not all economies can afford such a burden.

In general, developing nations do not have the technology or the know-how to reduce greenhouse gas emissions. They stand to lose the most because companies from these territories will have to pull out of the European market since they can’t comply with the carbon tax regulations. Some experts think that developing economies can submit a petition to the World Trade Organization (WTO) to secure some exemptions and protection from this tariff. Others suggest that regional organizations like the Association of Southeast Asian Nations (ASEAN) and the Asia-Pacific Economic Cooperation (APEC) can work together to share the administration costs and negotiate for carbon tax revenues to go to local industries instead of foreign authorities.

Disruptive impact

What are the effects of carbon taxes on developing countries? The UN trade agency United Nations Conference on Trade and Development (UNCTAD) estimates that with a USD $44 per ton carbon tax, developed nations will have an additional income worth USD $2.5 billion while developing economies will lose USD $5.9 billion. Developing economies in Asia and Africa have less capacity to undertake costly emission reductions. They also tend to be more exposed to climate risks, meaning they stand to gain more from emission reduction efforts in the long term. However, in the short run, they may have little incentive to comply with measures that could significantly impact their economies. Another reason for resistance is that developing countries can lose market share in developed economies since a carbon tax would make goods from developing countries more expensive. 

This imbalance does not conform to the principle of common but differentiated responsibility and respective capabilities (CBDR-RC). This framework states that advanced countries should take the lead in addressing climate change, given their large contributions to the issue, and their superior technologies to address it. Ultimately, any imposed carbon tax should take into account the different levels of development and capacity between developed and developing countries. A one-size-fits-all approach is not likely to be successful in getting all countries on board with slowing down climate change.

Wider implications of a carbon tax on developing countries

Possible implications of a carbon tax on developing countries may include: 

• Manufacturing and construction companies from developing economies losing revenues because of decreased global market share. This can also lead to unemployment in these sectors.
• The EU and other developed nations extending support, technology, and training to emerging economies to help lower their carbon emissions.
• Governments in developing economies incentivizing their local industries to invest in research for green technologies, including providing grants and securing funding from the international community.
• Regional economic organizations banding together to lobby for exemptions in WTO.
• Some carbon-intensive industries taking advantage of possible carbon tax exemptions for emerging economies and relocating their operations to these countries.

Questions to comment on

• How can carbon taxes be made more equitable for developing economies?
• How else can developed nations help emerging economies lower their carbon emissions?