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.