Implications of trade-related climate policies for developing countries

EU, US, and Chinese climate policies will negatively affect trade in some sectors of developing countries and create positive opportunities in others; the magnitude and direction of impact depends on a country’s product coverage and its particular conditions; supply and demand analysis focuses on traditional sectors like fossil fuels and manufacturing and green transition sectors like EVs, batteries, and critical minerals, with demand for outputs in fossil fuels and environmentally damaging sectors declining and demand for green transition inputs increasing depending on the current dominance of the exporters; a country’s exposure can be measured through its sector exposure – how much a sector is focused on the market where the policy adjustment occurs – and its economic exposure – broader repercussions on a country’s economy measured by the share of the affected products’ exports to the destination market in relation to the country’s GDP. (p. 11-13, Figure 2)

The EU’s ETS, EED, and RED, the US IRA, and China’s renewable targets and ETS are expected to significantly affect fossil fuels and related technologies by incentivizing the use and adoption of renewable energy and green technologies or rewarding increased fuel efficiency, thus reducing demand for fossil fuels; developing countries’ fossil fuels sectors have varied exposure to these policies; Libya, Azerbaijan and Angola are likely to experience significant economic impact from reduced fuel demand from the EU, US, and China as their fossil fuel exports represent more than 30 percent of their GDP; the CS3D regulation will increase costs for exporters in fossil fuel sectors due to new requirements for information gathering and reporting; Niger has the most exposed sector. (pp. 13-15, Figures 3-4)
Developing countries’ energy-intensive exports will likely be affected by the EU’s CBAM and CS3D regulations, China’s ETS, and climate mitigation policies; CBAM will increase competitiveness and opportunities of exporters with lower carbon emissions but reduce competitiveness for exporters who cannot comply; the impact of CBAM on export competitiveness in countries with no carbon pricing will depend on the sector’s export orientation and its relative emission intensity; using an aggregate relative CBAM exposure index, developing nations like Zimbabwe, Ukraine, Georgia, and Mozambique could suffer significant competitiveness losses from CBAM while Albania, Colombia, Jordan, and Morocco could become more competitive; Mozambique and Ukraine have the greatest economic exposure to CBAM; CS3D will impact metal exports to the EU directly and indirectly, with Armenia’s metal value chain the most affected. (pp. 15-17, Figures 5-7)
EUDR will impact agricultural and forestry exports from developing countries by imposing strict tracking and environmental standards, increasing costs and decreasing exports to the EU; sectors heavily exposed to the EU will be most affected, particularly Sao Tome and Principe and Guinea-Bissau which send more than 95% of corresponding exports to the EU; CS3D will affect all industries with significant environmental footprints, including textiles; Bosnia and Herzegovina, Ethiopia, Albania, and Tunisia have the most exposure. (pp. 17-18, Figures 7-8)

EU, US, and Chinese critical mineral policies will affect developing countries differently; Mongolia, North Macedonia, and Mozambique have the most exposed sectors as their exports are almost entirely directed to these economies; economic exposure is greatest in countries like Guinea and North Macedonia as a quarter of their GDP is from mining exports to these economies; CRMA will increase costs for critical minerals exports to the EU, but the EU’s demand from non-dominant mineral exporters will increase due to diversification requirements; in the medium to long-term, countries with abundant reserves will enter in or expand exports to the EU market as new mining operations arise; mineral reserve-rich developing countries may gain from the EU’s surging demand for critical minerals if they can scale-up production and improve competitiveness. (pp. 18-20, Figure 9, Tables 2-3)
The IRA is expected to boost US demand for critical minerals, especially for green technologies, benefiting eligible exporters; established producers of raw and processed critical minerals for EV batteries with a US FTA are expected to see increased exports (Mexico), while those without an FTA (Brazil and China) could lose market access; in the medium term, countries with large reserves could negotiate an FTA or target non-battery related industries to enter the US market; China’s green energy transition will drive demand for critical minerals from developing countries with rising EV production increasing the need for battery materials; China’s ETS could lead to greater demand for components to upgrade gas- and coal-fired energy plants; recycling critical minerals can greatly influence trade with developing countries. (p. 20)
EU, Chinese, and US policies are expected to boost demand for EVs and EV components from developing countries; countries with EV components sectors selling to these 3 markets stand to benefit the most, especially North Macedonia and Tunisia, whose EV component sales to these markets account for more than 5% of their GDP; for EV batteries, the DRC, Papua New Guinea, North Macedonia, and Bosnia and Herzegovina have the most exposed sectors, with more than 80% of their exports going to the 3 markets; the impact of the US IRA on battery sectors will change over time as US demand for imported EV batteries is expected to decline; US EV imports from developing countries may also decline; in contrast, the EU’s zero-emission regulation by 2035 may positively impact developing countries that export EVs as the rule’s requirements could increase demand beyond the EU’s domestic production capacity. (pp. 21-23, Figures 10-12)
EU, US, and China policies are likely to increase demand for renewable energy technologies and components; Bosnia and Herzegovina, North Macedonia, Serbia, Tunisia, and Cambodia are the most exposed with more than 80% of their exports going to the 3 markets, and renewable tech and components exports representing greater than 3-4% of their GDP. (p. 23, Figure 13)