Economic instruments (EI) can be considered as one of the most effective environmental policies since they provide incentives for actions without removing individual freedom of choice. From a policy viewpoint, EIs can be used to deter environmentally damaging activities, improve social equity, raise revenue or recover public-sector costs. Emission fee, tax and insurance are among the most popular EIs that are being used in many countries.


The case of EU

The European Union (EU) has adopted measures to reduce greenhouse gas (GHG) emissions and created the Emission Trading System (ETS) since 2005. This resulted in high production costs within the EU. Due to such measure, some manufacturers have relocated their production bases outside the EU and shipped products back in. The EU therefore has the idea of ​​levying a pre-cross-border GHG tax on imported goods called “Carbon Border Adjustment Mechanism” or CBAM so that goods imported into the EU must include the cost of emissions during the production process as well. This measure aims to maintain the competitiveness of EU manufacturers and to encourage other countries interested in reducing GHG emissions. Although there are many similar measures under consideration by other countries/areas, the EU is going be the first group of countries that impose a CBAM tax. Adoption of this policy will have a large impact in the global trade arena. However; who will be affected by this measure? And what are the challenges?

Originally, EU planned to start the CBAM scheme with five specific product groups that release large amount of GHG from their production processes. Such product groups include cement, fertilizer, iron, aluminum and power production. By specifying the year 2023 – 2025 as a transition period, which will allow importers of products in to the EU to record and notify the amount of GHG from production process before the official tax on the amount of emissions from production based on prices in the ETS market will begin in 2026. However, according to the latest proposals that the European Commission is preparing to submit to the European Parliament and the European Council for consideration, chemicals and plastic products might be added to the regulated group and there is a possibility that such a scheme will be rescheduled to as early as 2025, which reflecting the EU’s serious commitment to climate change policy.

The CBAM will have some impact to Thailand. Since 4.3% of Thailand exports to the EU or 0.35% of total Thailand exports (in terms of monetary amount for both) belongs to the product groups that fall into the CBAM category, which would be priced higher when sold in the EU. Thus, there is a risk that the export volume will decrease. However, it cannot be immediately concluded that Thailand will lose its competitiveness as CBAM will be enforced with other competitor countries that exports goods to the EU as well. Therefore, if Thai manufacturers can produce products with lower emissions than competitors, it should have a higher chance of competing. The GHG emission control will become another factor determining the ability to compete in the EU market.


The case of U.S.

The United States is also preparing to introduce a very similar measure. Draft regulation on the Fair, Affordable, Innovative and Resilient Transition and Competition Act (Fair Transition and Competition Act) was proposed in July 2021 to collect a Carbon Border Tax from products imported from all countries. The target products are petroleum, natural gas, coal, and products that are manufactured under carbon-incentive, such as aluminum, steel and cement. More items can be added into the system in the future. This regulation aims to increase the competitiveness of US businesses and is expected to be implemented as soon as 2024 since the United States is one of the EU’s main trading partners.

Another carbon tax from the United States is the American Innovation and Manufacturing Act of 2020. This regulation aims to reduce the production and use of hydrofluorocarbons (HFCs), one of the GHGs, by 85% in 15 years. President Joe Biden’s recent policy has called for Draft regulation on Rewording Efforts to Decrease Unrecycled Contaminants in Environments (REDUCE) which aim to impose excise taxes on virgin plastic raisins from manufacturers and importers at a higher rate. Initially the tax rate is 10 cents per pound. The rate will increase to 15 cents per pound in 2023 and 20 cents per pound in 2024. This tax will affect single-use plastic products, both plastic beverage packaging and food packaging.


Future development in Thailand

Thailand has followed such development aforementioned and is definitely trying to respond. On September 2022, Mr. Ekniti Nitthanpraphas Director-General of the Excise Department revealed that the Excise Department has also been studying on collection of GHGs tax or carbon tax. He thinks that setting up a carbon tax is inevasible for Thailand since there are many countries in the world have already started collecting similar taxes. Especially the EU countries are the first group of countries that will start collecting carbon tax soon. Thailand has studied on target products of which manufacturing process results in large GHG emission, especially product groups that are target by EU that are cement, fertilizer, iron, aluminum power production and chemicals and plastic products. “When many countries in the world start collecting this tax and if  Thailand has not been collected such a tax, when Thailand sells products to other countries that have carbon tax, Thailand’s products will also be subject to this tax. But if Thailand have already collected this kind of tax, we may be able to negotiate with other countries from which Thailand imports products for exemption.” Said Mr. Ekniti.

There are currently two approaches to collecting a carbon tax. First approach is taxation on products that involve carbon emissions. High carbon emissions equate to high taxes. Second approach is the taxation on the production process of the factory. Calculation must be done on how much carbon emissions that factories emit and this should be used as a baseline for tax estimation. Revenue Department is preparing to establish a cooperation project with Thailand Greenhouse Gas Management Organization (Public Organization) to estimate carbon emissions from production processes, which is difficult for financial official who has no direct knowledge on GHGs

On October 2022, Mrs. Oramon Sapthaweetham Director-General of the Department of International Trade Negotiations revealed that from tracking the movements of Thailand’s trading partners, it was found that the United States and the EU are in the process of drafting a law to impose tariffs on carbon emissions or GHG emissions on goods that manufacturing process results in high carbon emissions. The US Senate has proposed the Clean Competition Act (CCA) meanwhile The EU is also in the process of issuing a Carbon Border Adjustment Mechanism (CBAM). Compared to the United States CCA bill and the EU’s CBAM measure, it is found that both of the laws have the same goal of reducingGHG emissions. However, there are some differences in detail, for example CBAM measures will only apply to imported goods and will collect tax from all incurred carbon produced while the CCA bill will apply to both domestically produced and imported goods and will only collect tax from amount of carbon exceeding designated level. “At present, Thailand’s major trading partners are preparing to enforce more carbon tax measures. This will inevitably affect Thailand, which is an exporting country. Therefore, Thai manufacturers should be prepared to deal with such measures by accelerating the adjustment of production processes to reduce carbon emissions throughout the supply chain and provide information about carbon emissions as evidence for exports. Consideration must be given to upgrading the existing carbon pricing mechanism to be compatible with international standards in order to reduce the burden of paying taxes or buying carbon emission certificates that Thai manufacturers must pay to foreign countries as well,” added Ms. Oramon.

There are other movements in Thailand related to the issue of global warming recently in the news such as setting up GHG reduction activities as KPI of most government agencies and trying to reform departments under Ministry of Natural Resource and Environment to incorporate a new department that is focusing on global warming.