Carbon leakage in the food sector – are climate action and trade compatible?
In the first fortnight in November, the UN Framework Convention on Climate Change (UNFCCC) will hold its annual Conference, COP 26, hosted by the UK in Glasgow. The Conference will no doubt call all countries members of the Convention to reflect on the implications of last month’s IPCC report, referenced in our August newsletter, and press for increased urgency in GHG reduction.
This will no doubt include some discussion of the different levels of climate action committed to by various member countries, and the issue of carbon leakage.
What is carbon leakage?
The IPCC defines Carbon Leakage as “the increase in CO2 emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries. It has been demonstrated that an increase in local fossil fuel prices resulting, for example, from mitigation policies may lead to the re-allocation of production to regions with less stringent mitigation rules (or with no rules at all), leading to higher emissions in those regions and therefore to carbon leakage.”
The EU has a shorter, nattier definition: “Carbon leakage occurs when industries transfer polluting production to other countries with less stringent climate policies, or when EU products are replaced by more carbon-intensive imports.”
The concept is readily understood: the planet’s atmosphere is global, and so global greenhouse gas (GHG) emissions are what matters. Hence, if one country or group of countries go about imposing restrictions on all economic and societal activity to reduce emissions towards full neutrality, while another does less or nothing, industries in the more pro-active country will soon find themselves at an economic disadvantage, which is fundamentally unfair – but also inefficient in achieving the desired climate impact.
Irish farmers will particularly relate to the inequity of carbon leakage when it comes to food production. It grates to be asked to reduce your emissions – potentially even by having to reduce your livestock numbers – when you know that this will make room on global markets for products from less sustainable production systems in regions where government’s climate action is at best lip service.
National climate action targets v. carbon leakage
The Paris Agreement of 2015 focuses on climate action commitments from countries based on nationally determined contributions (NDC) – i.e. legally binding national targets for the reduction of GHG emissions – it would seem the global impact of the best v. worst performers may not have been sufficiently taken into account. The issue of how carbon leakage is (or not) adequately factored in is analysed in depth in The risk of carbon leakage in global climate agreements, a paper by Tobias Nielsen et al published a year ago in the International Environmental Agreements: Politics, Law and Economics journal. While it has been debated in detail for the heavy industry sectors emitting the bulk of global GHG, it is a problem which needs special consideration in the food and agriculture sector.
In an interview with the Irish Independent, outgoing Director of Teagasc Prof Gerry Boyle stated that the argument had a lot of validity. He said “There is no doubt in my mind that if we restrict say our production of beef by reducing the herd, it will be produced elsewhere and that will be counter-productive because global warming is, by definition, a global problem.”
The EU has modified its emissions trading system (ETS) to facilitate industries whose competitiveness is affected by carbon leakage, giving the sectors and sub-sectors deemed exposed to a significant risk a higher share of free GHG emissions allowances compared to the other industrial installations. Those sectors have been listed, and the list reviewed regularly. Currently, they include various forms of mining and manufacture of various products, including some metallurgic and basic pharmaceutical productions, and interestingly, the production of certain food products, including milk powders, casein, whey and lactose.
Part of the motivation for giving free GHG emission allowances as part of the EU ETS to those sectors is to avoid another side to carbon leakage: the prospect that companies would relocate outside of the EU to reduce their carbon costs.
In July, the EU has agreed to introduce a Carbon Border Adjustment Mechanism (CBAM), first flagged in the Green Deal communication of December 2019. This is a form of carbon tax on imports, which recognises the importance of addressing GHG emissions on a global basis. In announcing this project, the EU Commission stated: “This will ensure that European emission reductions contribute to a global emissions decline, instead of pushing carbon-intensive production outside Europe. It also aims to encourage industry outside the EU and our international partners to take steps in the same direction”.
The EU stated it designed the mechanism to be compatible with World Trade Organisation (WTO) trading rules, as well as its other international commitments. The infographic shows how the system is intended to work.
The new tax would be phased in, with a transitional phase from 2023 to 2025, prioritising the cement, iron and steel, aluminium, fertiliser and electricity sectors. It is intended to equalise the GHG emissions related cost of products whether produced within the EU or imported from regions with lower climate standards. But the idea is not just to protect the competitiveness of EU sectors, it is to promote greater climate action outside the EU – as we have said before, GHG emissions are global, even if reduction commitments are national.
Environmental NGOs are not much more impressed with the CBAM proposal than they were with the free ETS allowances for sectors deemed exposed to carbon leakage. In a statement last March, the World Wildlife Fund (WWF) said: “Should industry continue to get free allowances – as they are lobbying for and MEPs supported – even after the CBAM comes in, it would amount to a double subsidy for those sectors, and a disincentive to decarbonise. It would also unfairly push the cost of the EU’s climate rules onto third countries.”
Carbon import tax for food: careful what you wish for?
So, what about the food sector, which most of us would consider exposed to carbon leakage, especially in the context of trade deals? There does not seem any proposal from the EU to extend the CBAM to food imports as of now. Yet, while the EU food sector remains relatively protected by significant import tariffs, those are generally a top priority target for reduction in every trade agreement negotiation.
Farmers have legitimately voiced their concerns over the failure of trade negotiations to take adequate account of standard differences, including the climate efficiency of respective agricultural/food production systems. It would seem only right to provide a tangible recognition, built into the trade agreement, for the relative contributions to global warming of EU v imported food. If as the EU Commission tells us the CBAM is WTO compatible, why not extend it to food?
However, trade negotiations are complex and highly political processes – Brexit was a high-profile example. On the one hand, guarantees of equal standards, or even equivalence of standards, if they can be agreed, are difficult to verify when the EU does not have an inspection infrastructure on the ground in the countries concerned. On the other hand, imposing a unilateral carbon tax on imports could be seen as an act of trade war: remember the 25% import tariff imposed by the US on EU butter (96% of which from Ireland), cheese, whiskey and some other agri-food products over the EU/US dispute relating to state aids to Airbus and Boeing.
Ultimately, whether or not food is to be included in CBAM, it will be crucial to take account of the cost of climate action in all trade deals where they concern food. And this will not, and should not, absolve the EU (and Irish) food production sector from delivering on GHG emission reduction targets.
Update – EU JRC finds Green Deal will reduce EU food production capacity, increase food prices and cause carbon leakage
In our December 2020 newsletter, we had referenced the USDA impact assessment of the EU Farm to Fork and Biodiversity Strategies.
The EU’s Joint Research Centre (JRC) discretely published its own analysis of the Green Deal impact on EU agriculture in late July 2021. It warns its assessment is incomplete because it does not include some important elements from the strategies – food waste reduction targets, dietary shifts, organic action plan in particular.
It focuses on four areas only: the reduction of risk and use of pesticides, the reduction of nutrient surplus, and an increase in the organically farmed and high-diversity landscape features. Three scenarios are considered: a status quo baseline assuming no change from the 2014-20 CAP implementation, and two scenarios factoring in the CAP post 2020 legal proposal targeting these objectives, with and without the targeted use of Next Generation EU funding (the exceptional fund aimed at supporting EU member states in their post COVID19 and Brexit recovery, some of which was added to CAP funds).
The JRC predicts a decline in crop yields/animal numbers leading to production reductions of 10 to 15%, with the livestock sectors being the most impacted, reducing exports and worsening the EU’s trade balance.
Lower production is predicted to increase unit producer prices, rising from 8% (cereals) to 43% (pork), with beef by 24%, and milk by around 2%, which together with lower costs for all but fruit and vegetables, would lead to a positive impact on producer incomes. It further predicts that those producer price increases would trigger multiples of these increases for the sector as a whole – without explaining much how this would happen. Hence the JRC report states “The 24% price increase for beef would trigger a 126% increase in total income for beef meat production activities.”
It should be noted the JRC does not say anything about the impact of the Farm to Fork and Biodiversity Strategies on the number of EU farmers.
Price increases are naturally expected to impact consumer prices. The JRC warns that it hasn’t factored food waste reduction, which could reduce demand and production, and that price/demand elasticity and the degree to which imports are used to offset lower EU production could change the outcome significantly.
The analysis concludes that whatever the scenario, the measures would reduce the EU’s food production capacity, to a degree greater than suggested by the USDA – and, relevant to the theme of this month’s newsletter, the resulting GHG emission reductions could be substantially (up to around 65%) lost to sustainability leakage to third countries.
© Catherine Lascurettes, Cúl Dara Consultancy
