EU’s carbon tax move worries Bangladesh

The European Union (EU), Bangladesh's main export market, has taken initiatives to impose a carbon tax on imported goods, which the commerce ministry fears will adversely impact exports of readymade garments as well as textile, leather, plastic, and agricultural products.

Carbon tax is a fee imposed on burning of carbon-based fuel like coal, oil and gas to reduce the emission of carbon dioxide.

In December 2019, the EU announced its signature programme the Green Deal that it wants to implement to reach carbon neutrality by 2050. As part of the programme, the EU is going to levy carbon tax on imports from non-EU countries, causing worries among exporters.

The EU plans to impose a carbon tax on 44 sectors. Chemical products, basic metals, paper products, non-metallic mineral products, textiles and apparels, pharmaceuticals, leather and footwear, and plastic will be directly affected because of their high carbon intensity.

The EU, the single market of 26 countries, will impose the tax based on per tonne carbon emitted during the manufacturing of these products. The European Commission will announce the tax rate and the method of tax calculation in the second quarter of this year.

EU countries are destinations of more than half of Bangladesh's total exports. In the last financial year, exports to Europe amounted to $18.7 billion under the Everything but Arms (EBA) scheme.

Bangladesh enjoys duty-free exports of all products, except for arms. If the EU imposes a carbon tax on imported goods as part of the Carbon Border Adjustment mechanism, it will also apply to Bangladesh's export products.

The commerce ministry held an inter-ministerial meeting on 5 January to discuss the matter. The meeting, chaired by Additional Secretary to the commerce ministry and Director General of the World Trade Organisation (WTO) cell Md Hafizur Rahman, raised concerns that Bangladesh's exports to the EU would be disrupted if the carbon tax initiative was implemented.

Nevertheless, Bangladesh is in the EU's ongoing review of the Generalised System of Preferences (GSP) for 2023 and has decided not to take a public stand against the bloc on this matter in the interest of retaining the GSP facility in the European market.

Hafizur told The Business Standard that Bangladesh's main exports – garments and textiles – are among the high carbon-emitting sectors.

He said the tax would be levied on the amount of carbon emitted due to the use of chemicals, fuels, and water at different levels of production – from cotton to garments.

Bangladesh exports plastic, leather and leather goods, and agricultural products to Europe in large quantities, said Hafizur.

He explained, "Carbon is emitted during the production of fertilisers used in agriculture and during irrigation. Plastic, leather, and pharmaceutical sectors use large amounts of chemicals. Carbon is emitted during the production of these chemicals.

"Russia has opposed the EU initiative and already lodged a complaint to the WTO. China, Paraguay, Uruguay, and the US have supported Russia. Bangladesh will not be forthcoming to either Russia or the EU on the matter."

Apparel stakeholders told The Business Standard the WTO policy does not say anything clearly about imposing carbon tax this way.

But according to the policy, a country, if it wants to, can take initiatives to control imports of products that are harmful to human health and the environment, they said.

Mohammad Ali Khokon, president of the Bangladesh Textile Mills Association, said he has no clear idea about inclusion of textile in the Green Deal's 44 sectors and imposing a carbon tax on them.

He said Bangladesh, as the world's second largest exporter of readymade garments, would definitely suffer if a carbon tax was imposed on textiles and garments, but it would not be appropriate to comment on the matter before knowing all the details.

Mohammad Hatem, senior vice-president of Bangladesh Knitwear Manufacturers and Exporters Association, said imposing a carbon tax would have a negative impact on Bangladesh's exports because buyers in the EU would not want to bear that extra cost themselves.

He said the brands did not contribute at all to the heavy investments that had to be made in the apparel sector in response to demands raised by the EU and the US after the Rana Plaza collapse.

"We need big investments to use the technology needed to reduce carbon emission. So, before such taxes are levied, the EU needs to ensure fair prices for clothes," he added.

In 2005, the EU  imposed a carbon tax on its manufacturers under the Emission Trading System. Industries need to pay 30 euros in taxes for per tonne carbon emission. 

Various global trade research institutes are speculating that imports from non-EU countries may be taxed almost at the same rate to avoid conflicts with the WTO's most-favoured-nation policy. California has imposed a carbon tax on electricity imports from neighbouring states.

Under the WTO agreements, countries cannot normally discriminate between their trading partners. Granting a WTO member a special favour – such as a lower customs duty rate for one of their products – means the same has to be done for all other members. This principle is known as the most-favoured-nation treatment. 

International research institutes say the EU's initiative will have a major impact on world trade. For example, Russia's oil sales will decline in the international market due to carbon emissions from Russian fuel being higher than that of Saudi Arabia and the Middle East. 

Moreover, steel exports from various countries, including China and the US, will be adversely affected.

According to the EU, textiles, garments, leather, and footwear (TGLF), one of the largest sectors of the global economy and employment, are playing a serious role in environmental pollution. About 1,900 types of chemicals are used in the textile sector, especially at the dyeing and finishing stages, and the EU has identified 165 of them as highly hazardous.

The aim to impose a carbon tax, the European Commission says, is to make the economy "fit for a green future" and strengthen Europe's competitiveness while protecting the environment and giving new rights to consumers.

The new plan focuses on the design and production for a circular economy, with the aim to ensure that products placed on the EU market last longer; are easier to reuse, repair, and recycle; and incorporate as much as possible recycled materials instead of primary raw materials.

For the textile sector, the European Commission is proposing a new strategy to "strengthen competitiveness and innovation" in the industry and boost the EU market for textile reuse.

Textiles are the fourth highest-pressure category for the use of primary raw materials and water, and fifth for greenhouse gas emissions, according to the Commission. The new strategy is designed to support new consumption patterns and business models. 

Guidance will also be provided on separate collection of textile waste, which member states have to ensure by 2025.

The Commission says it will work with the industry and market actors to identify "bottlenecks in circularity" for textiles and stimulate market innovation.

According to a document released by the Commission in December, the Circular Economy Action Plan will encourage the textile industry to avoid or minimise waste by limiting the amount of packaging and substantiate the "green claims" made, also known as greenwashing. 

The textile value chain is responsible for a significant amount of the EU households' primary raw material consumption, and research suggests that apparel and footwear production emits more greenhouse gas than international flights and shipping combined. 

The global textile and clothing industry is presently responsible for 92 million tonnes of waste annually.