Tax, Trade, and Investment for Green Transition

Abstract

The carbon border adjustment levy by the EU is meant to address the issue of carbon leakage as a result of high carbon prices. The levy will come into effect in 2026 and therefore will impact trade with developing countries. The imposition of the levy will raise the costs to trade and have adverse economic consequences. This paper explores the implication that the Carbon Border Adjustment Mechanism (CBAM) will have for developing countries and whether the levy works against the principle of common but differentiated responsibility enshrined in the Paris Agreement. At the same time, the international corporate tax reform limits the possibility for countries to offer tax incentives, which means if developing countries are to transition to green energy they would have to do so without the possibility of offering these incentives. Developing countries thus find themselves in a bind while making their low carbon transition. This paper covers the two aspects of a green transition.