11-October-2024-Editorial

INDIA’S CONCERNS OVER THE EUROPEAN UNION’S CBAM AND EUDR

India’s Finance Minister recently criticized the European Union’s Carbon Border Adjustment Mechanism (CBAM) and European Union Deforestation Regulation (EUDR), calling them unilateral measures that create barriers for Indian industries.

These regulations aim to reduce carbon emissions and deforestation, but India views them as trade barriers that could harm its export sector, particularly in carbon-intensive goods like steel and aluminum.

What is the European Union’s Carbon Border Adjustment Mechanism (CBAM)?

CBAM is a tool developed by the EU to impose a carbon price on imported goods, especially those produced in countries with less strict environmental policies.

The mechanism is designed to level the playing field by ensuring that imports face the same carbon cost as goods produced within the EU, which are subject to the EU’s carbon pricing policies.

Key Features of CBAM:

• Fair Pricing of Carbon: CBAM aims to impose a fair price on the carbon emissions generated during the production of certain goods outside the EU.
• Example: It ensures that imports, like steel or cement, face the same carbon pricing rules as similar EU-made products.
• Encouraging Cleaner Production: It encourages countries exporting to the EU to adopt cleaner, more sustainable production practices by internalizing the cost of carbon emissions.
• Registration and Certification: EU importers will need to register with national authorities and purchase CBAM certificates corresponding to the emissions embedded in their imported goods.
• Annual Reporting: Importers will declare the emissions associated with their imported goods and submit the corresponding number of certificates annually.
• Adjustments for Carbon Price Paid Elsewhere: If a carbon price has already been paid in the producing country, the importer can get a reduction in the CBAM payment, avoiding double charges.
• Goods Initially Covered: CBAM initially targets carbon-heavy industries like cement, steel, aluminum, fertilisers, electricity, and hydrogen, but it will eventually expand to cover more sectors.

What is the European Union Deforestation Regulation (EUDR)?

EUDR is designed to ensure that goods sold within or exported from the EU are not linked to deforestation or forest degradation.

The regulation requires that companies prove their products are not sourced from recently deforested areas and do not contribute to environmental harm.

Key Objectives of EUDR:

• Preventing Deforestation: The regulation aims to stop commodities entering the EU market from contributing to deforestation or forest degradation.
• Reducing Carbon Emissions: EUDR is expected to help cut at least 32 million metric tonnes of carbon emissions annually by regulating deforestation-linked commodities.
• Combatting Forest Degradation: It seeks to curb the degradation of forests caused by the expansion of agriculture for commodities like cattle, soy, and palm oil.
• Commodities Covered: The EUDR targets products such as cattle, wood, cocoa, soy, palm oil, coffee, rubber, and related items like furniture, leather, and chocolate.
• Improving Transparency: It increases transparency in the supply chains of these commodities, ensuring better accountability for their environmental impacts.

Concerns Over CBAM and EUDR from India’s Perspective:

CBAM as a Trade Barrier:

• India is worried that CBAM could impose high tariffs (up to 35%) on its exports of carbon-intensive goods like steel, aluminum, and cement, making them less competitive in the EU market. In 2022, over 25% of India’s exports of these goods went to the EU.

CBAM as a Tool for Protectionism:

• The EU is using CBAM to protect its own industries while imposing tariffs on imports from countries like India. The revenue from CBAM will support the EU’s transition to greener industrial processes, further putting non-EU countries at a disadvantage.

Threat to Intellectual Property Rights (IPRs):

• Indian exporters fear that CBAM’s requirement for detailed data on production methods may lead to the disclosure of sensitive trade secrets, which could hurt their competitive position.

Impact on India’s Trade:

• The EU is India’s third-largest trading partner, and the CBAM could negatively impact this relationship, especially since Indian goods tend to have higher carbon intensity than European products.

Non-Compliance with WTO Rules:

• India has raised concerns about the legality of CBAM under World Trade Organization (WTO) norms, arguing that it creates uncertainty for countries like India despite their compliance with international climate commitments.

EUDR as a Non-Tariff Barrier:

• India also views the EUDR as another form of protectionism. The regulation requires companies exporting to the EU to prove that their products do not come from deforested land, which could create additional costs for Indian exporters, particularly in sectors like agriculture.

Impact on Net-Zero Goals:

• The CBAM and EUDR could slow India’s progress toward its net-zero emissions goal by 2070, as they would increase the cost of exporting carbon-intensive products to the EU.

Slowing Free Trade Agreement (FTA) Negotiations:

• The EU’s sustainability measures have become a sticking point in the ongoing India-EU FTA negotiations. India believes these regulations could hinder the development of a fair and balanced trade agreement.

Way Forward for India:

Advocate for Fair Trade Practices:

• India must challenge the legality of CBAM and EUDR in international forums like the WTO and push for fairer trade policies.

Invest in Clean Technology:

• India should accelerate its investments in cleaner technologies and sustainable production methods to reduce the carbon intensity of its exports and avoid CBAM-related tariffs.

Diversify Export Markets:

• By exploring new markets in Asia, Africa, and Latin America, India can mitigate the potential negative impact of CBAM and EUDR on its trade with the EU.

Counter EU’s Unilateral Measures:

• India could consider imposing retaliatory tariffs on goods from the EU or developing similar mechanisms to protect its industries from the impact of CBAM and EUDR.

Monitor Global Policy Trends:

• India should closely monitor global trade and environmental policies, like CBAM, to anticipate future challenges and develop strategies to protect its trade interests.

CONCLUSION:

The EU’s CBAM and EUDR are part of its efforts to combat climate change, but they also pose significant challenges for India’s trade. India needs to address these challenges by investing in cleaner technologies, diversifying its export markets, and engaging in international discussions to advocate for fairer trade practices.