CBAM Will Kill Manufacturing In EU; India To Levy Carbon Tax

Relevance: GS2 - Effect of policies and politics of developed and developing countries on India’s interests; GS3 - Environmental pollution and degradation, Environmental impact assessment

(Source: The Hindu, 11/03/2023)

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Why in the news?

Recently, India's Commerce and Industry Minister has asserted that the European Union's Carbon Border Adjustment Mechanism (CBAM) is inequitable due to the dissimilarity in carbon pricing between India and Europe.

What is Carbon Tax?

• Carbon Tax is a form of pollution tax which imposes a fee on the production, distribution, and use of fossil fuels based on the amount of carbon released during combustion.
• It is a potential alternative to the protocol's current 'cap and trade' method.
• The goal of this tax is to reduce the use of fossil fuels while also providing an incentive to use alternative energy sources.
• The basic idea behind a carbon tax is to make carbon-intensive activities more expensive, providing an economic incentive for individuals, businesses, and industries to reduce their emissions.

What is Carbon Border Adjustment Mechanism (CBAM)?

• The EU's Carbon Border Tax, formally known as the Carbon Border Adjustment Mechanism (CBAM), is a policy initiative aimed at addressing carbon emissions associated with the production of certain goods imported into the European Union (EU).
• It is a significant component of the "Fit for 55 in 2030" package, which outlines the EU's strategy to reduce greenhouse gas emissions by a minimum of 55% by 2030 compared to 1990 levels, in alignment with the European Climate Law.

Key Features of CBAM include:

• Coverage: It is primarily focused on imports of specific goods, including cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen.
• Carbon Pricing: Importers of these goods will be required to purchase carbon certificates that reflect the carbon emissions associated with the production of the imported products. The price of these certificates will be equivalent to the price of carbon allowances in the EU Emissions Trading System (ETS).
  • It is a market-based system that sets limits on carbon emissions for industries within the EU and allows for the trading of emissions allowances.
• Emission Transparency: It promotes transparency by calculating and certifying the embedded carbon emissions in the imported products. This measure helps ensure that imported goods are subject to a similar carbon pricing mechanism as those produced within the EU.

India's Concerns regarding CBAM

• Higher Costs: It could increase costs and reduce competitiveness for Indian exports to the EU, impacting sectors like steel and aluminum, valued at USD 8 billion annually. In 2022, India's 27 per cent exports of iron, steel, and aluminium products of value USD 8.2 billion went to the EU.
• Compliance Burden: It imposes a significant compliance burden on Indian producers and importers. It could also create administrative and technical challenges for Indian producers and importers, who will have to monitor, calculate, report and verify their emissions according to the EU standards.
• FTA Violations: It acts as a non-tariff trade barrier that contradicts zero-duty Free Trade Agreements (FTAs). India is subject to the levy while providing duty-free access for ostensibly "green" products, creating a perceived inconsistency in trade practices.
• Contradicts Green Commitment: It appears contrary to the EU's and developed nations' commitment to support the green transition in other countries, potentially hindering green initiatives in India and other emerging economies.

What is India’s Response and Carbon Tax Strategy?

• Carbon Tax Implementation: India plans to counterbalance the effects of the EU's carbon tax by introducing its own carbon tax system.
• Green Energy Investment: The revenue generated from India's carbon tax will be directed towards bolstering the nation's green energy initiatives. This strategic allocation of funds can indirectly assist exporters in transitioning to cleaner energy sources, consequently reducing their carbon emissions.
• Negotiations with EU: The Indian government is actively involved in ongoing discussions and negotiations with European Union counterparts, focusing on aspects such as the fairness and pricing disparities of the carbon tax, to seek equitable solutions.

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FAQs

MCQ

Question: ‘Broad-based Trade and Investment Agreement (BTIA)’ is sometimes seen in the news in the context of negotiations held between India and (UPSC 2017)

(a) European Union

(b) Gulf Cooperation Council

(c) Organization for Economic Cooperation and Development

(d) Shanghai Cooperation Organization