13 January 2024 – The Hindu

Carbon Border Adjustment Mechanism

• Experts closely following the situation have noticed that the European Union’s (EU) plan to impose a tax known as the Carbon Border Adjustment Mechanism (CABM) beginning on January 1, 2026, has sparked worries about higher costs for India’s exports. Indian exporters have been obliged to provide documentation on their procedures about every two months since October 2023.
• The European Union plans to deploy verifiers to review the filings made by exporters from India. At first, only some industries will be subject to this examination, but eventually, all imports into the EU are expected to be subject to this inspection.

What is the CBAM of the EU?

About:

• The EU’s “Fit for 55 in 2030 package,” which aims to reduce greenhouse gas emissions by 55% by 2030 compared to 1990 levels, includes the CBAM as a crucial component.
• With the help of this policy, carbon emissions linked to the manufacture of particular commodities imported into the EU will be subject to a fair price.

The environmental goals of CBAM:

• The goal of the CBAM is to promote cleaner industrial output outside of the EU and prevent carbon leakage by moving carbon-intensive operations to areas with less stringent environmental regulations.
• The EU hopes to encourage global adherence to strict climate rules and lessen the environmental impact of production activities outside its boundaries by expanding the carbon pricing to imports.

The European Green Deal and CBAM:

• As part of the European Green Deal, the CBAM imposes import taxes on non-EU nations’ carbon-intensive businesses in an effort to stop carbon leakage and preserve competitiveness.

Target Industries and Coverage:

• Cement, iron and steel, aluminium, fertilisers, power, and hydrogen imports will all be the focus of the CBAM.
• If these products’ home nations have less stringent climate regulations than the EU, they will be subject to carbon pricing measures.
• Carbon certifications for the embedded carbon emissions in imported goods will need to be purchased by importers.

Carbon certificates and market mechanisms:

• The pricing of carbon certificates under the CBAM will match with the rates in the EU Emissions Trading System (ETS).
• Within the EU, industrial emissions are regulated under this market-based approach.
• The need that importers obtain these certificates at costs commensurate with the carbon cost will encourage cleaner production methods worldwide.

What are the Difficulties in Putting CBAM into Practice?

BASIC Countries’ Reaction to the EU’s Proposal:

• The EU’s proposal was met with opposition by the BASIC countries, which are Brazil, South Africa, India, and China. They criticised it for being “discriminatory” and for going against the concepts of equality and “Common but Differentiated Responsibilities and Respective Capabilities” (CBDR-RC).

Absence of Worldwide Agreement:

• The global agreement expressed in Rio Declaration Article 12 calls into question the EU’s pursuit of a single global environmental norm.
• According to this article, developing countries shouldn’t be forced to adhere to norms that apply to established countries.

Problems with Greenhouse Gas Stocks:

• Additionally, the policy’s obligation to adjust the greenhouse content of imports in the inventories of importing countries undermines the usual method to greenhouse gas accounting.

Considered as a Covert Form of Protectionism:

• Potential protectionism is raised by the EU’s carbon border tax programme.
• Government measures that impede foreign commerce in an effort to support home businesses are known as protectionism.
• The tax may be interpreted as a covert kind of protectionism, raising the possibility of “green protectionism,” in which domestic businesses are unnecessarily insulated from outside competition in the name of environmental concerns.

What Consequences Does CBAM Have for India?

Problems with Trade between India and the EU:

• India, one of the top eight nations most negatively impacted by CBAM, could encounter difficulties because it sells $27% of its $8.2 billion worth of iron, steel, and aluminium products to the EU. Important industries like steel could also be severely damaged.
• The tax aims to reduce the attractiveness of Indian-made items to consumers by raising their pricing in the EU, which could result in a decrease in demand.
• Significant short-term issues could result from this development for businesses with greater greenhouse gas footprints.

The Effect of CBAM on Manufacturing:

• India’s Ministry of Commerce and Industry has called the CBAM “ill-conceived,” predicting that it will have a negative impact on the country’s manufacturing sector and could be the “death knell.”

Carbon Credit Trading System (CCTS) of India:

• In 2022, India amended the Energy Conservation Act and introduced its own carbon trading scheme, the Carbon Credit Trading System (CCTS).
• In addition to the Green Credit Programme Rules, which promote environmentally conscious activities beyond carbon reduction, the Ministry of Power is working on the details to operationalize the CCTS in India.
• The purpose of the CCTS is to encourage investments in clean energy while also reducing emissions.

India’s Few Choices for Managing CBAM:

• India has few options for dealing with CBAM, including arguing that it violates the principle of common but differentiated obligations in the Paris Agreement.
• If not, it can negotiate with the EU to get the money back so it can spend it on green technology.
• It is important for India to develop policies related to carbon taxes.
• India urgently has to develop its own carbon tax policies in line with the principles of the Paris Agreement, since the UK will be implementing its own CBAM by 2027.

Opposing FTA Norms:

• The criticism directed towards CBAM is that it is a non-tariff barrier that threatens zero tax Free Trade Agreements (FTAs). It is perceived as inconsistent because India pays the fee while permitting duty-free entry for ‘green’ items from EU member countries.

What Actions Can India Take to Combat CBAM?

Reaction against CBAM:

• In international fora, India ought to vigorously reject the CBAM on the grounds that it violates the fundamental idea of “common but differentiated responsibility.”
• The fairness envisioned in international climate agreements is challenged by CBAM, which places limitations on the industrialization potential of developing countries.

Examining Export Tax:

• India is considering a similar tax on exports to the EU as a strategic reaction. Although this could result in a similar tax burden for manufacturers, the money raised would present a special chance to reinvest in eco-friendly production methods.
• This lessens the effect of the present levies and puts India in a favourable position for any future reductions.
• Notwithstanding the possible advantages of an export tax, doubts remain regarding whether the EU will approve it and whether it can be implemented without raising legal issues on a national and international level.
• The success of this countermeasure rests on overcoming these uncertainties and gaining international collaboration.

The strategy of market diversification:

• India has to lessen its reliance on the EU market proactively in order to strategically respond to the challenges presented by CBAM.
• One of the most important steps in achieving market diversification is looking into new markets in areas such as Asia, Africa, and Latin America.
• By protecting India from the risks brought on by CBAM and other dynamic economic shifts, this strategy seeks to strengthen its already robust and flexible economic position.

Taking Advantage of the Green Opportunity:

• India can take advantage of the opportunities presented by the CBAM by starting the steps necessary to transform its production processes into more sustainable and environmentally friendly ones.
• Cleaner production incentives not only support international environmental objectives but also put India in a competitive position for a future in which carbon consciousness will be crucial.
• This proactive strategy aligns with India’s 2070 Net Zero Targets and advances the country’s long-term economic and environmental sustainability goals.

Way Forward:

• In order to protect its industries from potential negative effects, India needs to quickly formulate and implement carbon taxation measures that are in line with the principles of the Paris Agreement. The EU’s justification for CBAM, which aims to reduce greenhouse gas emissions and prevent carbon leakage, has prompted India to investigate creating its own carbon trading mechanism, the CCTS. The ongoing negotiations between India and the EU, as well as the challenge before the World Trade Organization.