Can Unilateral Trade Measures Significantly Reduce Leakage and Competitiveness Pressures on EU-ETS-Constrained Industries? The Case of China Export Taxes and VAT Rebates
Climate Strategies Working Paper
33 Pages Posted: 7 Jul 2010
Date Written: January 21, 2009
The unilateral use of export restricting measures such as export taxes and VAT refund by China on energy-intensive sectors has raised both hopes and concerns over the last couple of years inside the EU. From a European perspective indeed, export restricting measures on products where China represents a decisive share of world production are likely to ease the competitive pressure faced by European import-competing industries, through both a quantity (import volumes decline) and price (world price rise) effect. Mirroring the border trade adjustment (BTA) scheme originally contemplated in the EU, trade restrictions on Chinese exports might hence have an effect on trade “comparable” to any border adjustment mechanism set in a large importing country. Concerns regard first the environmental motives if any of such export restraints, and second, provided that they are part of a national commitment to combat climate change, the exact amount to which these trade effects could be part of a deal by actually avoiding leakages outside the EU. Both concerns are addressed in this paper. We show that at least formally and legally, China’s export restraints on energy-intensive products are presented by Chinese officials as contributor to China’s overall environmental goals. The second concern we more lengthy dwell upon is to the extent to which EU import and China export adjustment mechanisms have comparable effects from a climate change perspective.
Focusing on steel, aluminum and cement where risks of leakage are deemed plausible and export restricting measures have been raised in China during the last couple of years, we assess the comparability of China and EU commitment to combat climate change through a proxy given by the EU-ETS quota price equivalent of China’s export restrictions set on energy intensive products. After reviewing the rationale and current level of export taxes and VAT rebates on steel, aluminum and cement in China, we present the basic formula of EU-ETS quota price equivalent of China’s export restricting measures, and then apply it to steel, aluminum and cement. Our estimates of the EU-ETS quota price equivalent of Chinese exports restrictions provide figures of similar magnitude as the envisaged range of EU-ETS CO2 price, except for cement. We conclude by analysing the policy implications, and particularly, the leverage effects such export restraints could have in shaping a climate deal. Ongoing discussions with EU and Chinese officials triggered by IDDRI on this issue will provide first-hand material for such policy implications.
Keywords: Carbon Leakage, Export Tax, Export VAT Rebate Refund, China
JEL Classification: F13, F14, F18, F51
Suggested Citation: Suggested Citation