On avoiding risks and challenges for countries striving to reduce poverty and tackle climate change

• Border Carbon Adjustments (BCAs) should consider exemptions for direct exports from the least developed countries (LDCs) and include provisions for graduating LDCs to secure their development gains.
• The design of BCAs must take better account of complex supply chains that include LDCs and ensure that LDCs’ indirect exports (through countries subject to BCAs) are not penalised.
• Commensurate support is needed to help support BCA compliance, including through the development of carbon markets within LDCs and longer-term investment in inclusive green growth.    

Border Carbon Adjustments (BCAs) are a carbon price imposed on goods when they are imported into a jurisdiction with a higher carbon price. BCAs are intended to level the playing field between domestic products that adhere to climate change targets and imported products that do not. Such adjustments can help to maintain domestic climate ambitions and may encourage low-carbon investment throughout global supply chains.

Starting in 2022, BCAs could be implemented at scale in the European Union (EU) for the first time, and they are considered a crucial instrument to support the EU’s Green New Deal. However, the behavioural changes that may result are difficult to predict, and BCAs remain controversial. There are mixed reports of, on the one hand, a moratorium on BCAs being sought at the G7 presided by the UK, and, on the other hand, wider consideration of their adoption by a greater number of G7 countries, including by the UK.   

This article focuses on the risks and challenges for the least developed countries (LDCs), which face an unprecedented development challenge: poverty eradication and economic development amidst the climate emergency. It argues that the design of BCAs must take adequate account of indirect as well as direct exports from LDCs into the EU so they avoid penalisation, and specifically recognise those LDCs transitioning out of the category.   

How can BCAs be designed to protect LDCs in complex supply chains?

Currently, LDCs overall do not have significant exports in any of the sectors that the EU’s new BCA scheme is likely to target, though Mozambique does feature as an important supplier of aluminium. But, coverage of the EU’s Emissions Trading Scheme (ETS) is likely to grow in the future and therefore so too the scope of BCAs.

Additionally, there is scarce information on the potential for LDCs’ indirect exports to be affected through ripple effects in supply chains. There is potential to disincentivise exports that may serve sectors where BCAs are applied. For example, LDCs could be affected not only because they directly export to the EU, but also supply the EU indirectly, e.g. through other processing countries. Should those countries be hit with BCAs, LDC inputs could also be penalised and this may threaten export growth and economic diversification opportunities.  

Looking ahead, BCAs will prove onerous for all customs officials due to the complexity of counting carbon and proving or disproving the application of equivalent measures. Whilst we hope there will be progress towards common accounting, reporting and verification methods at COP26, overall BCAs are likely to increase trade costs, which are already very high for LDCs.

In short – LDCs will need enabling frameworks and substantial support to ensure that they are not penalised by BCAs, whether through indirect exports into the EU or the additional costs associated with compliance for direct exports.

What about LDCs in transition?

Whilst the European Commission may exempt LDCs (and Small Island Developing States or SIDS) from BCAs, it should be sensitive to the needs of graduating LDCs over the coming decades.

Before COVID-19 struck, an unprecedented number of LDCs were set to exit the category – progress rightly celebrated by the international community. Accordingly, there have been concerted efforts amongst development partners to support smooth transition strategies, particularly within the realm of trade.

LDC graduates typically benefit from the continuation of Aid for Trade support and market access preferences for a period of time, though this must be negotiated. While this has some significant transaction costs, it offers a natural vehicle for the European Commission to help LDCs in transition navigate the future implementation of BCAs. However, a formal transition period is also needed for BCAs, one that follows precedent established for LDCs.          

Because the framework for implementation of the Paris Agreement has not yet been concluded, LDC transitional paths in the climate arena are not yet clear. This needs to change ahead of COP26 and MC12, especially given the need to manage the potential costs of BCAs.      

How to finance inclusive green growth in LDCs

In the longer term, the ability of LDCs to navigate BCAs requires increased investment in inclusive green growth. This will require developed countries to meet their 2009 Copenhagen CoP commitments of US$100 billion of investment annually by 2020, but costs solely for adaptation are likely to reach $140-300 billion per year by 2030. There are reasons for deep concern: of reported climate finance flows of $78.9 billion in 2018, LDCs received only 14%, and SIDS just 2%.

The pandemic has aggravated the situation, with reduced ability to service debts and decreasing funds available for investment in renewable energy and sustainable infrastructure. Wealthy countries are pouring public money into economic stimulus packages (the World Bank estimates these currently total around $12.7 trillion), and many have a strong climate focus, like the EU’s Green Deal.

LDCs do not have access to this scale of resource, but need it the most. New sources of finance such as earmarking IMF Special Drawing Rights (SDRs) for climate investments and considering debt for climate and nature swaps are important ways to help leverage additional finance, but technical support will be required to unlock these opportunities. The EU should also consider how resources raised from BCAs could plug climate finance gaps. 

What should the G7 look for in BCAs?

For many LDCs, COVID-19 has exerted a terrible economic toll, with millions of people pushed back into extreme poverty, undoing decades of progress with nutrition, education and health. Achieving the Sustainable Development Goals will depend on a rapid, resilient economic recovery in LDCs. BCAs could be the right instrument to decarbonise supply chains beyond the EU’s borders, but the costs must not be borne by the poorest, who have contributed so little to global greenhouse gas emissions.

The EU must therefore design its new BCA mechanism with great caution and ensure that:

• LDCs are protected from the ripple effects of BCAs throughout supply chains, thereby maintaining a range of pathways for them to diversify their exports and build productive capacity;
• LDCs in transition are recognised and benefit from Aid for Trade and preferential market access for an extended period of time, including support to navigate new BCA accounting and reporting standards; and
• Affected LDCs have fair access to revenues generated by the BCA mechanism to support greening of their economies.

As the G7 considers BCAs, it must balance the urgency of climate action with the imperative of poverty reduction. A sophisticated, supportive design of this new mechanism will be required to drive emissions reductions throughout global supply chains without hampering the development prospects for LDCs.