OCE Seminar CBAM and Trade: Dec 18 11-12pm, Whitten 108A
OCE Seminar CBAM and Trade: Dec 18 11-12pm, Whitten 108A
Speaker: Ignacio Perez, Joint Research Center, European Commission
Date: December 18, 2024 at 11-12pm
Room: 108A Whitten
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Implications of the EU’s carbon border adjustment mechanism for fertilizer and food markets
The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) will enter its ‘definitive regime’ in 2026. Consequently, EU importers of certain energy intensive goods and electricity will be required to purchase certificates covering the carbon content embedded in the imports of these goods at the weekly average auctioned price (i.e. carbon price) from the EU Emissions Trading System (EU ETS). An important good covered by the CBAM is mineral fertilizer, a key input to conventional agricultural production. In this analysis we make use of an agricultural commodity model to assess the potential impacts that the CBAM may have on production, use and trade of fertilizer and food, with emphasis on critical issues such as greenhouse gas (GHG) emission reduction and carbon leakage. Under stringent climate policy, incentives may exist to relocate production to countries with laxer policies and higher emission intensity resulting in “carbon leakage”. We also address the implications of extending the CBAM to a set of countries with a similar policy in place, which is referred to as a CBAM club (or climate club) in the literature.
The main findings from the analysis are that a unilateral EU CBAM leads to moderately higher domestic fertilizer prices translating into modest agricultural EU and world market impacts. One third of EU reduced agricultural emissions will be leaked, meaning that they are emitted in connection with higher production in international agricultural markets. A CBAM club will have lower trade-distorting effects than a unilateral CBAM depending on bilateral trade. In terms of leakage, two thirds of CBAM club countries’ GHG emission reductions from agricultural production are instead leaked outside the club.
Trade Winds of Change: Cumulative Effects of Bilateral Trade Agreements on the EU Agri-Food Sector
As one of the world’s largest players in global trade, the EU pursues an open, sustainable and assertive trade strategy. The recent conclusions and ongoing negotiations of 10 European Union Free Trade Agreements (FTAs) with Australia, Chile, India, Indonesia, Malaysia, the Mercosur bloc (comprising Argentina, Brazil, Paraguay, and Uruguay), Mexico, New Zealand, the Philippines, and Thailand are expected to diversify the EU's agri-food trade and enhance the resilience of its food supply chain. This resilience hinges on diversifying import sources and market outlets, which can be achieved through a robust trade policy that ensures access to a sufficient supply of affordable food for citizens (European Commission, 2022). A two-step modelling approach was employed to assess ex-ante the cumulative economic impact of these FTAs on food commodity trade, production, consumption, and prices in 2032.
The analysis reveals that both EU imports and exports increase in value in the simulated scenarios, with notable sectoral variations. On the one hand, exports of dairy products and pig meat exhibit significant growth. On the other hand, the study identifies potential vulnerabilities of the EU beef, poultry meat, sugar, and rice sectors are identified.
The study also examines the impact of the United Kingdom’s trade agenda on the EU agri-food sector, quantifying the impact of the recent agreements between the UK, Australia, and New Zealand, as well as the UK’s future accession to the Trans-Pacific Partnership agreement on the EU agri-food sector.
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