CARBON BORDER ADJUSTMENT MECHANISM (CBAM) – ENVIRONMENT
News: International trade has a carbon problem
What is in the news?
● Recently,
Indian officials have talked about challenging the CBAM at the World Trade Organization
(WTO)’s dispute settlement.
Key takeaways from the news:
● New
Delhi fears that CBAM will cripple the export of its carbon-intensive products
to the European Union.
● While
India’s exports may be limited to aluminium, iron, and steel, and affect only
1.8% of its total exports to the EU, India has reportedly decried CBAM as being
protectionist and discriminatory.
● Technical
experts said that the international trade regime allows countries to adopt
unilateral measures for safeguarding the environment, and environmental
protection should not become a smokescreen for trade protectionism.
CARBON BORDER ADJUSTMENT MECHANISM:
● In
2005, the EU adopted an important climate change policy known as the Emissions Trading System (ETS).
● Now
in its fourth stage, the ETS is a market-based mechanism that aims at reducing greenhouse gas (GHG) emissions by
allowing bodies emitting GHG to buy and sell these emissions amongst
themselves.
● However,
the EU’s concern is that while it has a mechanism for its domestic industries,
emissions embedded in products imported from other countries may not be priced
in a similar way due to a lack of stringent policies or due to less stringent
policies in those countries.
● Furthermore,
the EU also apprehends the phenomenon of ‘carbon leakage’, that is, due to the
application of ETS, European firms operating in carbon-intensive sectors might
possibly shift to those countries that have less stringent GHG emission norms.
● CBAM
is aimed to level the playing field for the EU industries. Under the CBAM, imports of certain carbon-intensive products, namely
cement, iron and steel, electricity, fertilisers, aluminium, and hydrogen, will
have to bear the same economic costs borne by EU producers under the ETS.
● The
price to be paid will be linked to the weekly average of the emissions priced
under the ETS. However, where a carbon price has been explicitly paid for the
imported products in their country of origin, a reduction can be claimed.
WORLD TRADE ORGANIZATION’S NON-DISCRIMINATION
POLICY:
● Under
the principle of WTO law of non-discrimination, countries are required to
accord equal treatment to ‘like’ products irrespective of their country of
origin (most-favoured nation treatment) and to treat foreign-made ‘like’
products as they treat domestic ones (national treatment principle).
Issues in CBAM:
1.
Non-Compliance to WTO:
● The
CBAM has been criticised by some as being a violation of World Trade
Organization (WTO) rules. The WTO
prohibits countries from discriminating against imports based on their
environmental production methods.
2.
Administrative burden:
● The
CBAM would impose a significant administrative burden on businesses, as they
would need to track the carbon emissions associated with their imports.
● This
could be particularly challenging for
small businesses.
3.
Concern to developing countries:
● The
CBAM has been criticised by some as being unfair to developing countries, which
may not be able to afford to pay the carbon price.
● Eg. Steel and Aluminium
products from India.
4.
Affect trade relations:
● The
impact on the EU's trade relations: The CBAM could have a negative impact on
the EU's trade relations with other countries.
● Some
countries may view the CBAM as a protectionist measure, and they could
retaliate by imposing tariffs on EU exports.
5.
Increased cost:
● Increased
prices for consumers: The CBAM could lead to higher prices for consumers, as
businesses pass on the costs of complying with the mechanism to their
customers.
6.One size fits all approach:
● This
one size fits all approach will not be suitable to implement across the globe
as countries are having various degrees of economic development.
Issues of CBAM on India:
1. Impact on Indian Exporters:
● CBAM
could have significant implications for Indian exporters, particularly those in
carbon-intensive sectors such as steel, cement, and chemicals.
● Above
items are 30% of the total exports to the EU.
2.
Affect competitiveness of Indian
exports:
● The
additional costs imposed by CBAM could affect the competitiveness of Indian
products in international markets, potentially leading to a decline in exports
and a loss of market share.
3.
Non-compliance to WTO rules:
● The
implementation of CBAM is non-compliant with international trade rules,
particularly those established by the World Trade Organization.
● Against
the WTO policy of non-discrimination.
4.
Additional cost:
● Adequate
infrastructure, technological capabilities, and skilled personnel would be
required to calculate the carbon emissions in production and effectively
administer CBAM; This requires additional cost to the industries and exporters.
5.
Reduce domestic climate action:
● There
is a risk that it could reduce the incentive for domestic climate action in
India. If carbon-intensive industries are shielded from international
competition, they may have fewer incentives to adopt cleaner technologies or
reduce their carbon emissions.
WAY FORWARD:
1.
Fair treatment:
● Differentiation
could be vital to ensure fairness and avoid undue burden on countries with
varying levels of economic development.
2.
Collaboration among trading partners:
● India
can collaborate with its major trading partners to establish common standards
and methodologies for carbon accounting and verification.
3.
Promote research:
● India
can develop and deploy advanced technologies that reduce the carbon footprint
of its industries.
4.
Ensure the compliance of CBAM to WTO
rules:
● India
should collaborate with international organisations such as the World Trade
Organization and the United Nations Framework Convention on Climate Change, to ensure that CBAM is implemented in a manner
consistent with international trade rules and climate commitments.
5.
Climate finance under Paris agreement:
● Developed
countries should support developing nations like India in their transition to
low-carbon economies, which will encourage to adopt lower carbon footprint
manufacturing.