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European Union’s Carbon Border Tax |

European Union’s Carbon Border Tax

Context:

∙ The European Union (EU)’s Carbon Border Adjustment Mechanism (CBAM) is a concern for India and there is a pressing need for India to formulate its own carbon taxation measures.

What is Carbon Border Adjustment Mechanism (CBAM)?

∙ It is a tool to put a fair price on the carbon emitted during the production of carbon intensive goods and at most significant risk of carbon leakage like cement, iron and steel, aluminium, fertilisers, electricity and hydrogen that are entering the EU.

∙ According to a Global Trade Research Initiative (GTRI) report, CBAM will translate into a 20-35% tax on select imports into the EU.

∙ It intends to tax carbon-intensive products coming into the EU from January 1, 2026.

∙ The EU intends to achieve the target of a 55% reduction in Greenhouse Gas (GHG) emissions by 2030, compared to 1990 levels, under the European Green Deal by the CBAM.

Significance of CBAM

∙ Combating Greenhouse Gas Emissions: As a price on carbon, it discourages emissions. As a trade-related measure, it affects production and exports.

∙ By ‘equalising’ the price of carbon between domestic products and imports, the EU claims to promote fair competition, levelling the playing field between EU and non-EU businesses.

What are the issues with the CBAM?

∙ According to the United Nations Conference on Trade and Development (UNCTAD):

∙ Russia, China and Turkey were most exposed to the CBAM.

∙ India, Brazil and South Africa would be most affected among the developing countries.

∙ Mozambique would be the most exposed least-developing country.

Challenges for India w.r.t. CBAM

∙ Acting as a Trade Barrier: India’s exports of carbon-laden products to Europe — mainly aluminium and iron-and-steel — have been burdened with green reporting rules which is a trade barrier in itself.

∙ India’s 26.6% of exports of iron ore pellets, iron, steel, and aluminium products go, and exported these goods worth $7.4 billion in 2023 to the EU.

∙ India exported steel and aluminium, contributing nearly 14% of its export mix for all products.

∙ Uncompetitive Exports: India’s products have a higher carbon intensity than its European counterparts, the carbon tariffs imposed will be proportionally higher making Indian exports substantially uncompetitive.

∙ Impacting Balance of Payment (BoP): International climate policies compel other countries to impose similar regulation eventually translating to ‘a significant impact’ on India’s trading relationships and balance of payments.

∙ India is reportedly among the top eight countries that will be adversely affected by the CBAM.

Options available to India

∙ Carbon Trading Mechanism in India: The Carbon Credit and Trading Scheme (CCTS): It was notified by the Union Government under the Energy Conservation Act, 2001, to develop the country’s first-ever domestic carbon market.

∙ It was set up as the regulatory framework for the Indian Carbon Market (ICM), with BEE as the administrator.

∙ It envisioned the formation of a National Steering Committee for Indian Carbon Market (NSCICM) for the governance and direct oversight of the Indian Carbon Market (ICM).

∙ The committee will be chaired by theSecretary  (Ministry  of  Power); and co-chaired by the Secretary (Ministry of Environment, Forests and Climate Change).

∙ BEE will be the administrator for the ICM and will be responsible for the development of the GHG emissions trajectory and the targets for the entities to be obligated under the notification.

∙ The Central Electricity Regulatory Commission (CERC) will be the regulator for the trading of carbon credit certificates. 

∙ country’s international competitiveness.

∙ India has set the target of reducing the carbon intensity of its GDP by 33-35% by 2030.

∙ The government must consider the various challenges and opportunities in designing and implementing a carbon tax policy, including determining an appropriate tax rate, ensuring equity, simplifying the tax system, and ensuring transparency.

∙ A successful carbon tax policy in India could serve as a model for other countries and demonstrate the country’s commitment to addressing climate change.

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