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.