Europe’s Carbon Burden
Recent Situation:
- The European Union recently announced the progressive deployment of the carbon border adjustment mechanism (CBAM), which is seen as a return of frictions in a trade system that is intrinsically unfair.
- CBAM is a component of the EU’s efforts to reduce the effects of climate change, which include an emission trading system for pricing emissions.
The EU’s “Fit for 55 Agenda” for effective CBAM implementation:
- As the EU intensifies its attempts to take free allowances from the system, there is concern that enterprises would transfer to jurisdictions where comparable regulations do not exist.
- The EU has been forced to augment its “Fit for 55 Agenda” with a charge on imports from nations that do not price carbon.
CBAM’s impact on trade and business between the EU and other countries:
- The EU is a vital trading partner. Despite its large regional commerce, the mix of trade in individual goods and services is not dominated by the EU.
- Turkey, Russia, South Korea, India, and China, for example, are the EU’s top five steel import suppliers. Similarly, Russia and Mozambique contribute for half of the country’s aluminium imports.
- The initial phase of the CBAM will cover both of these products, as well as cement, fertiliser, power, and hydrogen.
- The concern is that this will have a substantial impact on commerce with nations such as India, which depends on the EU for exports. CBAM could possibly cover 26.4 percent of India’s exports of items.
Trade relations between India and the EU, as well as the preparedness of Indian corporations:
- Many in the Indian corporate sector have been planning for CBAM compliance.
- Tata Steel, for example, operates in the EU market and has prior experience switching to green steel. CBAM would push the company to shift faster, according to its annual report 2022-23, and the experience will aid with the transformation in India.
- Along with it, society must bear carbon-related expenses (not CBAM), either through higher steel prices or through public spending or subsidies.
The following are the likely outcomes of a tax increase under CBAM:
- It is probable that the EU will lose money as a result of higher input costs being passed on to consumers.
- Steel and aluminium are critical not just for its primary exports, such as automobiles, but also for the green transition (aluminium).
- CBAM will apply to aluminium even though the EU considers it a key mineral and is struggling to increase output.
- Except for the fact that CBAM is designed to keep mineral suppliers such as China out of the EU, it is difficult to reconcile these with the imposition of tariffs on imports. Previously, a similar strategy was used to protect smelters.
What should India’s reaction be to this tax?
- There is the World Trade Organisation to challenge the measure as discriminatory. However, CBAM highlights more severe worries about the industrial sector’s structure, which will be dominated by enterprises and countries that can weather the winds of change.
- The EU and the United States have responded to the challenge by developing incentive programmes to attract investments and maintain competitiveness.
- India may have to innovate as well. With limited budgetary space, an internal carbon market in conjunction with an effective taxing mechanism may not only encourage enterprises in that direction, but may also benefit consumers and small businesses.
- Such pricing systems can also be used to negotiate equivalence with the CBAM, because common but differentiated responsibility means that India can price carbon differently depending on its degree of development.
Conclusion:
- CBAM is an important EU imitative to reduce carbon emissions during manufacturing, services, and trade and commerce, which will aid in combating climate change.
- However, India must respond with a strategy that ensures carbon pricing in line with its development aspirations.
