The Food and Agriculture Organization of the United Nations is the UN's specialized agency leading the global efforts to eliminate hunger and malnutrition.
Thank you for inviting the FAO to appear as part of a panel of witnesses. The FAO does not prescribe policy choices for countries. Rather, it provides an inventory of evidence-based policy options and their related trade-offs and impacts. Coming from a technical specialized agency, I will focus my remarks on the impacts of border carbon adjustments and reciprocity of standards on food and agriculture.
Climate change is a truly global environmental negative externality. Its impacts are indivisibly spread around the entire planet. It affects many economic activities, including agri-food systems, which are responsible for 28% of all greenhouse gas emissions. Its potential costs are not accounted for by markets and the benefits from mitigating its impact cannot be divided and claimed by one country. Several policy incentives can help improve emissions efficiency and lower greenhouse gas emissions per unit of output.
In my statement, as I discuss different policy instruments, I am not referring to any specific country.
Carbon taxes and other such instruments, such as emission trading systems, directly tackle the failure of the market to take the social costs of climate change into account. However, at the same time, a unilateral action to impose a carbon tax on food imports may put the country implementing it at a competitive disadvantage in global markets. A carbon tax may result in a carbon leakage, which is the displacement of lower carbon footprint domestically produced food by cheaper and higher carbon footprint imports from countries that do not take similar measures to reduce emissions. This could result in income losses for domestic producers and an increase in emissions globally. This is why global negative externalities such as climate change require global solutions.
Trade can expand the reach of climate change mitigation policies. There has been considerable interest in the potential use of border tax adjustments that could be based on the carbon footprint. Adjusting for the carbon tax means that the same rate applying to the carbon footprint of domestic products would be applied to imports. In this case, low-emitting suppliers would face a low tax and would be able to compete with domestic products, while high-emitting suppliers would face a higher tax, which would make them less competitive. In this way, trade will be shaped not only by comparative advantage, but also by the relative emissions efficiency.
A major technical challenge in determining and applying this border tax adjustment is to calculate the carbon footprint of domestic products and imports, and apply an appropriate tax on domestic products and corresponding tax adjustments on imports in order to level the playing field. Where an explicit carbon tax is applied on domestic products, it would seem relatively straightforward to apply a corresponding border tax adjustment on imports, provided that the carbon footprint that these emissions generated in producing and supplying the imports can be determined.
Problems arise in calculating these border tax adjustments when import suppliers have internalized emission costs or if the tax applied in the exporting country exceeds that applied by the importer, a case in which a tax rebate on imports would be made. In this case, it would be necessary to determine the per unit carbon tax equivalent of these measures.
The design and implementation of a carbon tax on food and agricultural products would face several challenges. There would be a need to agree on the carbon accounting mechanisms and on a carbon footprint for all food and agricultural products produced worldwide. There would also be a need to agree on a price of carbon to be able to set the tax and avoid international trade disputes.
Any approach to border tax adjustments presents the dual challenge of determining the carbon footprint in both domestic and imported products, while ensuring compliance with the rules of the international trading systems.
In closing, reducing greenhouse gas emissions in agriculture requires several actions across sectors, including the application not only of mitigation practices, but also of adaptation practices through climate-smart agriculture and policies.
Thank you, Mr. Chair, for the opportunity to comment on this topic and for your patience in allowing me a little more time. I welcome questions from the committee.