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Carbon Leakage - Reason behind EU's Carbon Border Tax

Carbon leakage is a term that used to denote the movement of businesses from developed countries as they raise their climate ambition to non-developed countries as they follow less stringent environmental and climate policies.

Nov 19, 2022

5 min read

List of contents in this explainer about Carbon Leakage

S.No	Contents
1.	What is carbon leakage?
2.	Why businesses exit from developed economies?
3.	Policies that facilitate movement of businesses to non-developed countries
4.	The European Union statement
5.	Carbon Border Adjustment Mechanism
6.	Opposition of BASIC nations
7.	Prelims questions
8.	Mains question

What is carbon leakage?

Carbon leakage is a term used to denote the movement of carbon-intensive businesses out of developed economies. They shift their production to economies with less stringent carbon rules.

Why businesses exit from developed economies?

Developed nations in efforts to cut emissions impose high costs on carbon-intensive businesses.

To escape from the negative impacts of high costs, businesses simply move their production to a country with less stringent rules.

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Policies that facilitate movement of businesses to non-developed countries

Developed countries raise their climate ambition

On the other hand, non-developed countries follow less stringent environmental and climate policies

The European Union Statement

As per the European Union, carbon leakage means companies based in the EU could move carbon-intensive production abroad to take advantage of lax standards, or EU products could be replaced by more carbon-intensive imports.

Carbon Border Adjustment Mechanism

Carbon leakage is the reason behind the European Union's suggestion of a Carbon Border Adjustment Mechanism or more popularly Carbon Border Tax at the United Nations Framework Convention on Climate Change COP-27 being held at Sharm-el-Sheik, Egypt.

Carbon Border Adjustment Mechanism impose an import duty on a product manufactured in a country with less stringent climate rules than the one buying the product.

Opposition of BASIC nations

At the COP-27, BASIC (Brazil, South Africa, India, and China) countries opposed the policy. In a joint statement, the BASIC nations argued that the carbon border tax could result in market distortion and aggravate the trust deficit amongst UNFCCC Parties.

Prelims Questions

1. Carbon leakage is the reason behind the European Union's suggestion of a

A. Technology Mechanism and the the Technology Executive Committee

B. Climate Technology Centre and Network (CTCN)

C. Carbon Border Adjustment Mechanism

D. Carbon Neutrality Regime

2. Consider the following statements

1. Carbon leakage is a term used to denote the movement of carbon-intensive businesses out of developing economies.

2. Carbon leakage occur due to developed nation's efforts to cut emissions.

Select the correct statement/s

A. 1 only

B. 2 only

C. Both 1 and 2

D. Neither 1 nor 2

Explanation

Carbon leakage is a term used to denote the movement of carbon-intensive businesses out of developed economies. They shift their production to economies with less stringent carbon rules.

Mains Question

1. What is carbon leakage? Discuss the relation between carbon leakage and carbon border tax.

Reference/Image : Indian Express, Kanenori/Pixabay

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