D3.3 Report and policy brief on the results of the integrated model-based assessment

For the assessment of tangible linkages between trade regimes, market dynamics and real-life impacts, MATS integrates qualitative and quantitative modelling with the analysis carried out for 15 case studies.

Three modelling techniques are used, one qualitative and two quantitative (one applied at the national level, and one focused on international trade dynamics). The use of three modelling techniques is required to assess trade policy frameworks and instruments (drivers), in terms of shaping demand, determining production practices and generating social and environmental impacts (at global, national and local level), measured using various SDGs.

Specifically, qualitative modelling (i.e., system maps) were created using a participatory, co-creation approach for CS2 on oats (EU, Finland), CS3 on dairy (EU, Finland), CS5 on poultry (Ghana), CS10 on beef (EU, Africa, South America), CS13 on milk (EU, Africa, America), CS14 on pork (Brazil), CS15 on olive oil (Tunisia). This offers a wide variety of applications across sectors and geographies. Each system map, also called Causal Loop Diagram (CLD) is fully customized to the socio-economic and environmental context analysed and offers insights on the dynamic interrelations existing across indicators. This analysis offers information on the transformative potential of policy intervention for agricultural trade sustainability.

Quantitative models were also developed for selected case studies (CS3, CS5, CS13 and CS14). Different models were employed for these assessments, ranging from spatial analysis to assess impacts of land cover change on ecosystem service provisioning, to MS Excel-based Cost Benefit Analysis (CBA), to integrated systems models.

These assessments implemented at the sectoral, national or sub-national level are complemented by an international trade analysis, informed by the work carried out across case studies. This analysis was performed with a GCE model. This model, named GDynEP, is dynamic and recursive, in order to include capital accumulation and technological change over time. Different scenarios are created and compared to represent the economic and distributional impacts of alternative climate policy design, including (i) the unilateral implementation of a net zero emissions target by the European Union (EU) in line with the Fit-for-55 objectives, (ii) the introduction of a Carbon Border Adjustment Mechanism (CBAM) as a compensatory measure for reducing carbon leakage and competitiveness loss of energy-intensive EU industries, and (iii) the possible multilateral implementation of a net zero carbon emissions target thanks to the adoption of climate clubs arriving at an ideal climate policy setting with a world-based climate club, corresponding to an average 30% reduction of global emissions with respect to the reference case (Tagliapietra and Wolff, 2021). Scenarios are also differentiated according to the specific GHG aggregation used, comparing standard CGE results with only energy-based emissions with the new GDynEP version including all GHGs.

The key findings of the CGE analysis can be summarized as follows:

·       A unilateral climate policy implemented by the EU might bring to a 60% carbon leakage effect by 2030 since the abatement effort by the EU are largely compensated by the increase in emissions by several regions driven by trade diversion effects and lower international energy prices.

·       The introduction of a CBAM trade policy based on a carbon intensity measure compliant with WTO (World Trade Organization) rules applied to the rest of the world is not effective in reducing the carbon leakage effect since a large portion of the increased emissions is provoked by the augmented trade flows directed to non-EU regions.

·       The combination of a unilateral EU carbon pricing and a CBAM trade policy might result in a reduction of Gross Domestic Product (GDP) for the EU by -0.2% w.r.t. the carbon pricing alone. African regions experience mixed effects by 2030, with a GDP loss by -0.36% for energy exporters and a GDP gain by 0.10-0.12% for countries located in the Horn of Africa.

·       There is a valuable improvement in global emissions reduction from the implementation of a trade policy agreement between the EU and African regions where African countries are excluded from the CBAM policy application and engaged into a domestic emissions abatement policy. An average -27% reduction in emission intensity is registered by 2030 in African regions, with peaks by -19% in rice production in South Africa or by -35% for livestock production in North African countries.

·       The inclusion of all GHGs in the climate policy strategy and related carbon pricing mechanism significantly changes the economic and emissions impact related to different policies as agricultural productions and emission-intensive chemical industries strictly connected to the primary sector (including fertilizers and pesticides) are fully involved in the abatement policies.

·       While distinguishing African regions that are also covered in several of the MATS case studies (incl. AFNorth, AFCentr and SouthAfrica), many African regions would contribute significantly to the reduction of GHGs when applying domestic measures for reduction in carbon intensity, while gaining in terms of GDP and export competitiveness towards the EU market. Significantly, when all GHGs are included in policy scenarios, abatement efforts by African regions bring the largest positive impact on GDP of those agricultural intensive regions (AFNorth, AFWest, AFHorn). On the opposite, when only combustion-based CO2 emissions are modelled, African energy exporters are those countries gaining the most from the removal of CBAM and the implementation of domestic abatement policies.

·       All regions and sectors are affected by an increase in consumer prices when the introduction of low-carbon objectives is achieved only by carbon pricing. There is a large diversity in the impact on prices for different regions and sectors, with selected African regions as AFEnex, AFCentr and SouthAfrica strongly suffering from price increases in agricultural sectors that are key to increase food security issues with respect to rice, vegetables, and livestock activities.

·       On the opposite, improvements in factor productivity associated to the introduction of sustainable agricultural practices also contribute to reducing consumer prices. The efficiency gains in the production process of primary goods combined with a reduction in domestic prices turns abatement efforts into an improvement in food security.

·       Trade gains for selected African regions participating into the climate club with the EU are significantly high since the European market represents a large quota of African exports. The region benefiting the most from being included in the EU climate club is AFWest with an in increase in the export share both on the EU market and on the rest of the world for all primary goods. Similar results are found for the AFCentr region, where export activities are improved especially in the rice and raw meat sectors.

·       The combination of carbon neutral improvements with selected efficiency gains in input productivity for the agricultural sector in African regions on average is responsible for positive socio-economic impacts. Consumer prices are reduced and food security improved, GDP growth rate is sustained by efficiency gains and the participation into the EU climate club makes these regions more competitive in exports of primary goods in the EU and the global market. All these positive outcomes also constitute an effective strategy to reduce potential negative distributional impacts on households related to stringent climate policies, turning climate neutrality into a win-win solution also for developing regions.

The policy implication from these results is that the capacity of CBAM to prevent the risk of carbon leakage and support the EU’s increased ambition on climate mitigation, while ensuring WTO compatibility, is limited if foreign partners do not apply domestic carbon pricing mechanisms. On the opposite, in the case of the African regions considered in this study, domestic efforts in mitigation and the consequent exemption from CBAM application would generate both an improvement in export competitiveness towards the EU market and a reduction of carbon leakage by 6% in the case of fossil-based CO2 emissions and by 21% when all GHGs are considered.

We therefore find that the EU carbon policy mechanisms, to meet the targets of the Fit-for-55 plan, should include both a CBAM and efforts in forming as many climate clubs as possible (with the goal to build a global commitment to carbon neutrality, originating from a stimulus towards decarbonization at country level).

Additionally, by sustaining technology transfer and the diffusion of best practices in agricultural production in less developed regions, the inclusion into a climate club could be complemented by ad hoc support instruments to make the carbon neutrality pathway also compatible with a more inclusive and equal development transition, resulting into typical win-win solution with environmental gains followed by positive well-being achievements.

In D3.3, the integrated modelling framework applies to seven case studies and its results provide guidance for assessing the impact of sustainable agricultural trade policy at local, national, regional and global level, across a range of social, economic and environmental indicators. The policy brief - integrated model-based simulation and assessment of linkages with agricultural market, trade and investment dynamics summarizes the insights emerging from these modelling assessments.