CARBON TAX MECHANISM - ENVIRONMENT

CARBON TAX MECHANISM - ENVIRONMENT

News: EU’s carbon border tax mechanism unfair to developing countries

What’s in the news

Carbon Border tax

The European Union's (EU) intention to implement a Carbon Border Adjustment Mechanism (CABM) tax starting January 1, 2026, has raised concerns about increased costs for India's exports, as noted by experts closely monitoring the situation. Since October 2023, Indian exporters have been required to submit documentation on their processes approximately every two months.

 About:

·         The CBAM is a key element of the EU's "Fit for 55 in 2030 package”, designed to slash greenhouse gas emissions by 55% by 2030 compared to 1990 levels.

·         This policy is set to impose a fair price on carbon emissions associated with the production of specific goods imported into the EU.

CBAM's Environmental Objectives:

·         The CBAM seeks to drive cleaner industrial production outside the EU, discouraging carbon leakage where carbon-intensive activities relocate to regions with lax environmental standards.

·         By extending the carbon pricing to imports, the EU aims to promote global adherence to stringent climate policies and mitigate the environmental impact of production processes beyond its borders.

CBAM and European Green Deal:

·         The CBAM is a component of the European Green Deal, designed to prevent carbon leakage and maintain competitiveness by imposing import duties on carbon-intensive industries from non-EU countries.

Coverage and Target Sectors:

·         The CBAM will specifically target imports of cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen.

·         These goods will face carbon pricing measures if their countries of origin have less rigorous climate policies than the EU.

·         Importers will be required to purchase carbon certificates corresponding to the embedded carbon emissions in their products.

Market Mechanism and Carbon Certificates:

·         The pricing of carbon certificates under the CBAM will align with the rates in the EU Emissions Trading System (ETS).

·         This market-based system regulates industrial emissions within the EU.

·         Importers will need to acquire these certificates at prices reflecting the carbon cost, incentivizing cleaner production practices globally.

 Implications for India Due to CBAM:

Issues in India-EU Trade Relations:

  • India, being among the top eight countries adversely affected by CBAM, faces potential challenges as it exports 27% of its iron, steel, and aluminium products worth $8.2 billion to the EU, and key sectors like steel may be significantly impacted.
  • By elevating the prices of Indian-made goods in the EU, the tax threatens to diminish their appeal to buyers, potentially leading to a decline in demand.
  • This development could pose significant near-term challenges for companies with larger greenhouse gas footprints.

CBAM’s Impact on Manufacturing:

  • India's Commerce and Industry Ministry has criticised the CBAM as "ill-conceived," foreseeing detrimental effects on India's manufacturing sector, potentially acting as the "death knell."

India's Carbon Credit Trading System (CCTS):

  • India has introduced its own carbon trading mechanism, the Carbon Credit Trading System (CCTS), amending the Energy Conservation Act in 2022.
  • The Ministry of Power is working on the specifics to operationalize the CCTS in India, which is complemented by the Green Credit Programme Rules, encouraging environmentally proactive actions beyond carbon reduction.
  • The CCTS aims to incentivize emission reductions and boost clean energy investments.

India's Limited Options to Navigate CBAM:

  • India's strategies to deal with CBAM are limited, which includes challenging it as violative of the Paris Agreement's common but differentiated responsibilities principle.
  • Otherwise, it can negotiate from the EU to return collected funds to invest in green technologies.

Obligatory for India to Formulate Carbon Taxation Measures:

  • With the UK enforcing its own CBAM by 2027, there is a pressing need for India to formulate its own carbon taxation measures aligning with Paris Agreement principles.

Against FTA Norms:

  • CBAM is criticised as a non-tariff barrier that undermines zero duty Free Trade Agreements (FTAs). India pays the levy while allowing duty-free entry for supposedly 'green' products from EU member countries, which is seen as contradictory.

Source: https://www.downtoearth.org.in/climate-change/eus-carbon-border-tax-mechanism-unfair-to-developing-countries-cse