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EU lawmaker calls for carbon border tax revenues to boost climate finance

Support to clean up industries in least developing countries is needed for proposed tax to comply with WTO rules, says Mohammed Chahim

Revenues from the EU’s planned carbon border tax should be used to help the poorest countries decarbonize their polluting industries, a lawmaker leading the issue on the issue has proposed.

In a draft report submitted to the European Parliament and seen by Climate Home News, Mohammed Chahim, a centre-left MEP, called for additional climate finance for low-income countries affected by a proposed tax on carbon-intensive goods imported to the union. .

The report, which will be discussed by lawmakers in early February, is a response to the European Commission’s proposal for trading partners to pay a carbon price equal to that of EU businesses.

Chahim’s proposed changes would broaden the scope of the tax and roll it out more quickly, with some support to soften the blow to least developed countries (LDCs).

“It is important that we work together rather than confronting our trading partners,” he told Climate Home News. The tax “should not affect the least developed countries disproportionately”.

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The levy aims to prevent “carbon leakage”: heavy industry fleeing Europe to countries with lower environmental standards as the bloc gets lower carbon.

Experts have expressed concern about certain poor countries that rely heavily on trade with the EU and bear little responsibility for causing the climate crisis.

Chahim’s report calls for the tax, to come into effect in 2026, to be introduced earlier and on a wider range of imports, adding organic chemicals, hydrogen and polymers as sectors initially covered by the tax.

A transition period would be shortened from three to two years and free allowances would be phased out by the end of 2028, eight years earlier than the Commission had proposed.

There would be no general exemption for the least developed countries from these rapidly increasing costs under Chahim’s plan.

Instead, additional climate funding “at least equivalent in financial value” to the revenues generated by carbon adjustments at the border would be earmarked to support the decarbonisation of the LDC’s heavy industries. This, in turn, would lower the cost of tariffs going forward.

The Commission would be mandated to report annually on how these additional funds have been used to tackle climate change in low-income countries.

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Chahim told Climate Home that support for LDCs was needed to make the carbon tax compatible with World Trade Organization (WTO) rules, which regulate trade between countries by reducing barriers and avoiding discrimination.

The rules allow countries to take trade-related measures to protect the environment. If the revenues generated support the decarbonization of the LDC’s industries, the policy is justified as an environmental measure, Chahim said.

“We believe this is a necessary condition to be WTO compliant,” he explained.

While there is broad support among lawmakers for using the revenues from the tax as additional climate finance, some EU member states are expected to argue that paying off EU debt should come first.

For Tim Gore, head of the Climate and Circular Economy Program at the Institute of European Environmental Policy, how the revenues are used will be critical to the EU’s ability to convince its trading partners of the value of its policies.

“It is important for the EU to show that it has found new, complementary and more useful climate finance,” said Gore. “This is going to be an important part of the diplomatic puzzle. If the EU is to achieve this with international trading partners, it will have resources on the table for support.”

Financing the decarbonisation of industries in LDCs would set a precedent that other countries considering a similar carbon border tax, such as Canada, could follow, he added.

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While major emerging economies have labeled the levy unfair, low-income countries are still coming to grips with how the proposal will affect them.

Aluminum dominates Mozambique’s exports, of which more than 80%, for example, go to the EU. Other African countries such as Cameroon, Guinea, Zimbabwe, Zambia, Algeria and Morocco are highly exposed to the proposed tariffs. They are not all MOLs.

Saliem Fakir, executive director of the African Climate Foundation, welcomed Chahim’s report as “opening the debate” on applying equality principles to the EU’s plans.

But he told Climate Home more could be done to turn the levy into an effective transition mechanism for the bloc’s trading partners.

Fakir argued that very low carbon intensity LDCs, such as Mozambique, should be exempted from the scheme.

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