EU’s Green Deal: Will Bangladesh’s export suffer in the long run?

The European Union (EU) has moved to impose carbon tax in several sectors as part of a long term initiative, known as the EU's Green Deal that lays out a blueprint for climate neutrality aiming to transform Europe into a carbon neutral continent.  

Although garments and leather items, the main export products of Bangladesh, are not included in the initial list, they can be added at any time in the future as they are on the risk list.

In that case, international trade experts and environmental economists fear that these Bangladeshi products could face increased competition, which could hurt exports. They say that this green deal can change the trading environment of not only Bangladesh but the whole world.

Insiders say, China has already imposed carbon tax as part of its efforts to reduce carbon emissions and avoid possible carbon taxes in the European markets. Several competitor countries of Bangladesh including Vietnam and India have already taken this initiative.

Economists have advised Bangladesh to be prepared now to face the possible scenario in the future. As part of this, they have emphasised introducing carbon tax and carbon market in the country as well as gradually focusing on renewable energy.

Research and Policy Integration for Development (RAPID) is studying the carbon tax, carbon market creation, world trade and its impact on Bangladesh in light of the EU's Carbon Deal.

The chairman of the organisation, M A Razzaque, told The Business Standard that Europe has initially included six sectors in the list of carbon taxes and has not yet introduced it for imported goods. As a result, there is no possible impact on Bangladesh right now.

"But our readymade garments and leather products are on the risk list and if it is introduced after 2026, our products could be subject to entry tax, which could mean added competition for us," he said.

Conditions to avail the GSP Plus facility to Europe after Bangladesh transitions from the category of Least Developed Country are still being discussed and it is unlikely that the main export product Apparel will get that benefit. On top of it if a carbon deal or environmental, social and governance (ESG) compliance are added the export market can become more difficult for Bangladesh.

The European Green Deal is a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases by 2050.

According to the EU's Green Deal, every sector that uses carbon-emission intensive fuel must pay the fee. Under the EU carbon border adjustment mechanism (CBAM), iron and steel, cement, fertiliser, aluminium and electricity generation sectors are already subject to carbon taxation.

Starting in 2026, carbon tax will be levied on imports from foreign companies by EU listed buyers. This means importers will pay for embedded emission and buy CBAM certificates from the said time.

EU importers of goods are covered by the CBAM registers with national authorities where they can also buy CBAM certificates. Certificates are priced on weekly emission trading system (ETS) allowances. EU importers will need to declare the emissions embedded on its imports and surrender the corresponding number of certificates each year. If importers can prove that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted.

A carbon price of $28 o per tonne of CO2 on imports is equal to a 2% import tariff.

Potential impact on Bangladesh:

There are a number of products under these sectors which Bangladesh does not export much to the European market. As a result, if the current policy continues in the future, it will not create major concerns for Bangladesh with regard to the green deal. But according to the initial assessment of RAPID, apparel, leather and footwear are among the 63 sub sectors deemed at risk for carbon leakage. The EU might include these items to the list later on.

Besides, Bangladesh is set to graduate from the Least Developing Countries status in 2026 and lose the Everything but Arms (EBA) benefits in 2029. Unless Bangladesh can secure the GSP Plus facility, EU RMG importers will then have to pay nearly 12% duty. Vietnam, however, will enjoy duty-free access as the country has a Free Trade Agreement (FTA) with the EU.

Additional carbon tax on Bangladesh's products can hinder exports and competitiveness. According to the United Nations Conference on Trade and Development (UNCTAD), exports of the targeted carbon-intensive sector from developing countries could decline by 1.4% to 2.4%.

Entrepreneurs in the apparel sector, however, are not alarmed by the EU's move.

Md Fazlul Hoque, managing director at Plummy Fashions Ltd, one of the greenest factories in the world, located in Narayanganj told TBS that Europe will not take any initiative that no one can comply with. Then their supply chain will be ruined.

According to him, Bangladesh will be ahead of other countries in the green initiative.

"There are more than 160 green factories here now, and it will not be difficult for other entrepreneurs to walk the same path in the future," he added.

However, he also said it is not yet clear what Europe is going to do with the Green Deal.

Possible way out:

Dhaka University's Economics Professor Rumana Huque, who is working on health and climate change, told The Business Standard, "Bangladesh must immediately begin to study the issue in detail and prepare in light of the standards of buyer countries. Otherwise, it may lag behind its competitors in export trade."

M A Razzaque said that Europe's carbon tax policy does not allow double taxation. So, if Bangladesh is already preparing to impose a carbon tax, then there will be no need to pay for the export of goods to EU countries.

"Another option is to focus on renewable energy. Our industrialists and policy makers need to be aware in this regard," he added.

China has already launched a carbon market, and Vietnam is in the process of doing the same. There is no carbon tax or carbon market in Bangladesh yet. However, a few years ago a surcharge of 1% was imposed on the polluting industries.