International Trade Has A Carbon Problem
Context:
- The Carbon Border Adjustment Mechanism (CBAM), a crucial climate measure of the European Union (EU), has alarmed India.
The fundamental problem:
- New Delhi worries that CBAM will make it impossible for it to export carbon-intensive goods to the EU.
- India has reportedly criticised CBAM as being discriminatory and protectionist, despite the fact that its exports to the EU are barely 1.8% of its overall exports and are limited to steel, iron, and aluminium.
- Dispute resolution proceedings against the CBAM at the World Trade Organisation (WTO) are also being discussed.
- The connections between trade and the environment are highlighted by this discussion.
- Although the international trade system permits nations to adopt unilateral environmental protection measures, environmental conservation should not be used as a cover for trade protectionism. This perspective must be used while looking at the CBAM.
Emissions Trading System (ETS) information:
- The Emissions Trading System (ETS), a significant climate change programme, was established by the EU in 2005.
- The ETS, which is currently in its fourth stage, is a market-based mechanism that seeks to lower greenhouse gas (GHG) emissions by enabling GHG emitting entities to purchase and sell their emissions among one another.
- Although the EU has a mechanism for its domestic industries, it is worried that emissions in items imported from other nations may not be charged similarly because of a lack of strict laws or because those nations have less strict policies.
- The EU is concerned that this may disadvantage its industries. The EU’s affected industries have up until this point been given free allowances or permits under the ETS to combat this.
- The EU also recognises the ‘carbon leakage’ problem, which is the possibility that European businesses engaged in carbon-intensive industries may relocate to nations with less restrictive GHG emission standards as a result of the implementation of the ETS.
The CBAM:
- The goal of CBAM is to solve this conundrum and level the playing field for EU industries.
- Imports of some carbon-intensive goods, like as cement, iron and steel, energy, fertilisers, aluminium, and hydrogen, will be subject to the same financial burdens as EU producers under the ETS under the CBAM.
- The price to be paid will be based on the ETS’s weekly average price for emissions.
- However, a decrease can be asserted where a carbon price has been expressly paid for the imported goods in their place of origin.
The effects on India:
- The EU represents 11.1% of India’s total international trade, according to figures from the commerce ministry, and is the third-largest commercial partner of India.
- This levy might reduce demand by making Indian products less appealing to consumers and raising their prices in the EU.
- Companies with a high carbon footprint would face substantial short-term issues as a result of the tax, and the world trading system would be further disrupted by increased protectionism, trade wars, and renegotiations.
- The carbon tax method would encourage the use of cleaner technology, but without sufficient funding and support for newer technologies, it would be equivalent to taxing poor nations.
Moving ahead:
- India must develop and guard its market in the EU. India currently has a surplus with the EU in both commerce and services.
- In order to protect its exports to the EU through a free trade agreement or other means, India should have bilateral discussions with the EU. If India needs to make any adjustments or adhere to any norms, it should look forward to doing so.
- India is a significantly smaller exporter of steel and aluminium than other nations, and it does not export cement or fertilisers to the EU.
- India is not the goal of this EU policy; rather, it is Russia, China, and Turkey, which are important producers of steel and aluminium as well as large carbon emitters.
- There isn’t much of a rationale for India to lead the opposition. Instead, it ought to have a bilateral discussion and resolve the matter with the EU.
- India only needs to adapt and design its existing climate change mitigation measures so that they are consistent with the country’s key markets.
