Economic Research Forum (ERF)

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

2195
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

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Egypt’s labour market: new survey data for evidence-based decision-making

As Egypt faces substantial social and economic shifts, understanding the labour market is crucial for designing policies that promote employment and inclusive economic growth. This column introduces the latest wave of the Egypt Labor Market Panel Survey, which provides fresh, nationally representative data that are vital for examining these dynamics.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Corruption in Iran: the role of oil rents

How do fluctuations in oil rents influence levels of corruption in Iran? This column reports the findings of new research, which examines the impact of increases in the country’s oil revenues on corruption, including the mechanisms through which the effects occur – higher inflation, greater public spending on the military and the weakness of democratic institutions.

More jobs, better jobs and inclusive jobs: the promise of renewable energy

Among the many economic and environmental challenges facing the countries of the Middle East and North Africa (MENA), two stand out: the need for jobs and the need to combat the threat of climate change by moving away from reliance on fossil fuels. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digital technologies on existing jobs, reduce its carbon footprint and create significant levels of employment, particularly for women and the youth, across a variety of sectors.

The evolution of labour supply in Egypt

Egypt stands at a critical point in its demographic and labour market evolution. As this column explains, while fertility rates have dropped, reducing long-term demographic pressures, the ‘echo generation’, children of the youth bulge, will soon enter the labour market, intensifying the need for policies to accelerate job creation. At the same time, participation in the labour force, particularly among women and young people, is declining, partly as a result of discouragement.

Towards a productive, inclusive and green economy in MENA

Decarbonisation of the global economy is a huge opportunity for countries in the Middle East and North Africa. As this column explains, they can supercharge their development by breaking into fast-growing industries that will help the world to reduce its emissions and reach net zero, as well as offering greater employment opportunities and new export lines. Micro, small and medium enterprises in the region can lead the transition to a cleaner and sustainable future, but this may require the formation of clusters of firms that overcome some of the constraints that their limited size could involve.




LinkedIn