Economic Research Forum (ERF)

Europe’s carbon pricing plans: potential effects on Turkey’s economy

2444
The European Union’s newly introduced carbon border adjustment mechanism will have considerable effects on outside countries’ bilateral trade with the region. As this column explains, the European Green Deal and other new EU regulations, such as the circular economy action plan, will force trading partners to be more active on climate policy. It is in the interest of those countries to establish national emission trading systems (linked to the EU’s existing scheme), which would minimise the possible costs.

In a nutshell

The EU’s carbon border adjustment mechanism would have the worst impact on Turkey’s cement and electricity sectors.

Accelerating the preparatory process of instituting an emission trading system in Turkey – preferably linked to the EU’s own scheme – will help to minimise economic losses.

An active climate policy will help to ease the country’s climate-friendly transformation; revision of the target for ‘intended nationally determined contributions’ and ratification of the Paris climate agreement in parliament are two steps that can be taken immediately.

In December 2019, the European Union (EU) announced the European Green Deal to create a climate-neutral continent by 2050. The initiative focuses on three basic priorities of industrial strategy: world-leading and globally competitive industries; industries oriented towards the goal of becoming climate-neutral; and preparing for the transition to the digital future. The EU intends to achieve this transition within the framework of the circular economy.

The Green Deal is expected to transform production and trade patterns not only within the EU but also globally through the newly introduced mechanisms and regulations. The existing EU emissions trading system (ETS) will be revised to maintain economic growth in the face of possible losses in competitiveness, leading to ‘carbon leakage’ as industries relocate to countries with no carbon taxes.

The carbon border adjustment mechanism (CBAM) is one of the measures proposed to tackle the carbon leakage problem. In essence, it is expected to serve as an import fee levied by the carbon-taxing region (in this case, the EU) on goods manufactured in non-carbon-taxing countries (in this case, Turkey).

The CBAM is expected to have a considerable effect on emissions-intensive Turkish exports (Yeldan et al, 2020) as the EU continues to be the top destination for Turkish exports (accounting for 47% of the total in 2018).

Here, we seek to shed light on the possible steps that can be taken to minimise the possible costs to be incurred by Turkish industries due to carbon pricing through an analysis conducted with input-output methodology.

In 2018, Turkey emitted a total of 520.9 Mt CO2e into the atmosphere. This sum is grouped by the greenhouse gas inventory under energy combustion (321.2 Mt), industrial and agricultural processes (130.0 Mt) and household waste (69.6 Mt). After leaving aside the household waste, we allocate the remaining 451.3 Mt of greenhouse gas emissions to the 24 sectors by making use of the TurkStat data, as reported to the UNFCCC inventory system.

In the second step, we conduct an input-output analysis to calculate the sectoral emissions embodied in the exports to the EU to analyse the potential effects of the CBAM on Turkish sectors exporting to the EU market.

The decomposition of emissions embodied in exported goods to the EU market in 2018 is shown in Figure 1.

Figure 1: Greenhouse gas emissions embodied in Turkish exports to the EU (2018, Mt CO2e)

Turkish exports to the EU in 2018 contained 36.2 Mt of CO2e emissions (Scope 1-2-3), and the majority of them were concentrated in the cement (CE), machinery (MW), automotive (AU), iron-steel (IS) and textiles (TE) sectors.

The high carbon intensity of electricity production in Turkey is one of the vulnerabilities of the country’s exporting sectors. Figure 1 shows that the Scope 2 emissions (7.7 Mt) embedded in EU exports account for 21.3% of the total emissions (36.2 Mt CO2e).

Irrespective of their Scope 1 emissions, heavy reliance on electricity inputs in the textiles (TE), chemicals (CE), iron-steel (IS), machinery (MW) and automotive (AU) sectors would pose serious competitiveness risks in the EU export market.

During the transitional 2023-26 period, the CBAM will apply to the Scope 1 and Scope 2 emissions of handful of products grouped under the cement, iron-steel (aluminium included), chemicals and electricity sectors.

Multiplying respective Scope 1 and Scope 2 emissions with carbon prices of €30 and €50 gives the carbon costs that would be faced by these sectors. Figure 2 shows that the short-run cost of the CBAM ranges between €367 million and €611 million annually.

Figure 2: Carbon costs (million euros)

While, the CBAM will affect iron-steel, aluminium, cement, fertilisers and electricity at the beginning (between 2023 and 2026), its emission scope and product coverages are expected to be increased.

Figures 3 and 4 show the sectoral carbon costs and shadow tax rates (sectoral carbon cost as a percentage of EU export revenues) by assuming that the CBAM will cover ‘all’ emission scopes of ‘all’ model sectors in the long run.

Figure 3: Carbon costs in the long-run (all scopes)

It can be observed from Figure 4 that the CBAM would have the worst impact on the cement and electricity sectors in Turkey.

Figure 4: CBAM tax rates in the long run

Possible policy proposals

Accelerating the preparatory process of instituting an emission trading system in Turkey (preferably linked to the EU’s ETS) will help minimise economic losses. Rather than transferring to the CBAM authority, under such a system, Turkey would keep the carbon bill that ranges from €1.1 billion to €1.8 billion in Turkey that can be used to decarbonise the sectors.

Overall, a shift to an active climate policy will help Turkey to access climate finance opportunities that will ease the climate-friendly transformation of Turkish sectors. Revision of the target for ‘intended nationally determined contributions’ and ratification of the Paris climate agreement in parliament are two steps that can be taken immediately.

 

Further reading

Acar, S, AA Aşıcı and E Yeldan (2021) ‘Potential Effects of the EU’s Carbon Border Adjustment Mechanism on the Turkish Economy’, ERF Working Paper.

Yeldan, E, AA Aşıcı and S Acar (2020) Ekonomi Göstergeleri Merceğinden Yeni İklim Rejimi’ [New Climate Regime through the Lens of Economic Indicators], TÜSİAD Report.

Tags: , , , ,

  • Sevil Acar
    Sevil Acar
    Associate Professor of Economics, School of Applied Disciplines at Boğaziçi University
  • Erinç Yeldan
    Erinç Yeldan
    Professor of Economics and Dean, Kadir Has University
  • Ahmet Atıl Aşıcı
    Ahmet Atıl Aşıcı
    Associate Professor of Economics, Istanbul Technical University

Most read

Trust in Lebanon’s public institutions: a challenge for the new leadership

Lebanon’s new leadership confronts daunting economic challenges amid geopolitical tensions across the wider region. As this column explains, understanding what has happened over the past decade to citizens’ trust in key public institutions – parliament, the government and the armed forces – will be a crucial part of the policy response.

Qatarisation: playing the long game on workforce nationalisation

As national populations across the Gulf have grown and hydrocarbon reserves declined, most Gulf countries have sought to move to a more sustainable economic model underpinned by raising the share of citizens in the productive private sector. But, as this column explains, Qatar differs from its neighbours in several important ways that could render aggressive workforce nationalization policies counterproductive. In terms of such policies, the country should chart its own path.

Small businesses in the Great Lockdown: lessons for crisis management

Understanding big economic shocks like Covid-19 and how firms respond to them is crucial for mitigating their negative effects and accelerating the post-crisis recovery. This column reports evidence on how small and medium-sized enterprises in Tunisia’s formal business sector adapted to the pandemic and the lockdown – and draws policy lessons for when the next crisis hits.

Economic consequences of the 2003 Bam earthquake in Iran

Over the decades, Iran has faced numerous devastating natural disasters, including the deadly 2003 Bam earthquake. This column reports evidence on the unexpected economic boost in Bam County and its neighbours after the disaster – the result of a variety of factors, including national and international aid, political mobilisation and the region’s cultural significance. Using data on the intensity of night-time lights in a geographical area, the research reveals how disaster recovery may lead to a surprising economic rebound.

The impact of climate change and resource scarcity on conflict in MENA

The interrelationships between climate change, food production, economic instability and violent conflict have become increasingly relevant in recent decades, with climate-induced economic shocks intensifying social and political tensions, particularly in resource-constrained regions like MENA. This column reports new evidence on the impact of climate change on economic and food production outcomes – and how economic stability, agricultural productivity and shared water resources affect conflict. While international aid, economic growth and food security reduce the likelihood of conflict, resource scarcity and shared water basins contribute to high risks of conflict.

Qatar’s pursuit of government excellence: promises and pitfalls

As Qatar seeks to make the transition from a hydrocarbon-based economy to a diversified, knowledge-based economy, ‘government excellence’ has been identified as a key strategic objective. This column reports what government effectiveness means in terms of delivery of public services, digitalisation of services, and control of corruption – and outlines the progress made to date on these development priorities and what the country needs to do to meet its targets.

A Macroeconomic Accounting of Unemployment in Jordan:  Unemployment is mainly an issue for adults and men

Since unemployment rates in Jordan are higher among young people and women than other groups, unemployment is commonly characterised as a youth and gender issue. However, the majority of the country’s unemployed are adults and men. This suggests that unemployment is primarily a macroeconomic issue challenge for the entire labour market. The appropriate response therefore is coordinated fiscal, monetary, structural and institutional policies, while more targeted measures can still benefit specific groups.

The green energy transition: employment pathways for MENA

The potential employment impacts of green and renewable energy in the Middle East and North Africa are multifaceted and promising. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digitalisation on existing jobs, reduce its carbon footprint and create significant levels of employment across a variety of sectors. Green energy is not just an environmental imperative but an economic necessity.

Global value chains, wages and skills in MENA countries

The involvement of firms in production across different countries or regions via global value chains (GVCs) can make a significant contribution to economic development, including improved labour market outcomes. This column highlights the gains from GVC participation in terms of employment quality in Egypt, Jordan and Tunisia. Given the high unemployment, sticky wages and wide skill divides that are common in the MENA region, encouraging firms to participate in GVCs is a valuable channel for raising living standards.

Tunisia’s energy transition: the key role of small businesses

Micro, small and medium-sized enterprises (MSMEs) play a critical role in Tunisia’s economy, contributing significantly to GDP and employment. As this column explains, they are also essential for advancing the country’s ambitions to make a successful transition from reliance on fossil fuels to more widespread use of renewable energy sources. A fair distribution of the transition’s benefits across all regions and communities will secure a future where MSMEs thrive as leaders in a prosperous, inclusive and sustainable Tunisia.