26-Oct-2023-Special-Article

INDIA MUST STRATEGISE AGAINST EU CARBON TAX

The European Union’s (EU) implementation of the Carbon Border Tax (CBAM) under the “Fit for 55 in 2030 package” has significant implications for India’s exports.

This policy, set to be enforced from January 1, 2026, aims to impose a fair price on carbon emissions associated with the production of specific goods imported into the EU.

As the CBAM comes into effect, Indian exporters face challenges such as increased costs, compliance issues, and potential contradictions with existing trade norms.

EU’s Carbon Border Tax (CBAM):

Policy Overview:

CBAM is part of the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030.

It targets carbon emissions from the production of goods like cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen imported into the EU.

Importers must purchase carbon certificates reflecting embedded emissions, aligning with EU Emissions Trading System prices.

 

Objective and Rationale:

CBAM intends to promote cleaner industrial production globally and prevent carbon leakage.

It aligns with the EU’s commitment to reducing carbon emissions and achieving climate goals outlined in the European Climate Law.

India’s Concerns regarding CBAM:

Impact on Costs and Competitiveness:

CBAM could lead to a 20-35% tax on select Indian exports to the EU, particularly in steel and aluminum sectors.

India’s significant exports in these sectors (around USD 8 billion annually) face increased costs, potentially affecting competitiveness.

Compliance Challenges:

CBAM poses administrative and technical challenges for Indian producers and importers, necessitating adherence to EU emission standards.

Smaller Indian firms may encounter difficulties, reminiscent of challenges faced during the EU REACH regime in 2006.

Against FTA Norms:

CBAM is criticized as a non-tariff barrier, contradicting the essence of zero-duty Free Trade Agreements (FTAs).

India faces the levy while granting duty-free entry for ‘green’ products, raising concerns about fairness.

Contradiction with Green Transition Commitments:

CBAM contradicts the EU and developed nations’ commitment to supporting the green transition in other countries.

The tax may result in a flow of funds in the opposite direction, hindering the global shift towards sustainable practices.

How should India respond to the EU’s CBAM?

Resisting CBAM in Multilateral Forums:

India should vehemently oppose CBAM in international forums, emphasizing its impact on the developing world’s industrialization capabilities.

Working Around CBAM:

India can explore the possibility of imposing a similar tax on its exports to the EU, with funds directed towards environmentally friendly production processes.

However, uncertainties exist regarding the acceptance and legality of such a move.

Diversify Export Markets:

India should strategically reduce dependence on the EU market by exploring opportunities in regions like Asia, Africa, and Latin America.

Diversification can mitigate vulnerability to the CBAM’s effects and other economic changes.

Incentivizing Greener Production:

India can prepare for a greener and sustainable future by incentivizing cleaner production methods.

This approach aligns with India’s developmental goals and economic aspirations while meeting international environmental standards.

Conclusion:

The EU’s Carbon Border Tax poses formidable challenges for India’s exports, particularly in sectors crucial to its trade with the EU.

To navigate this situation, India must adopt a multifaceted strategy. Engaging in international forums to oppose CBAM, seeking bilateral agreements, diversifying export markets, and promoting greener production are imperative.

Balancing environmental responsibility with economic prosperity is essential for India’s standing in a carbon-conscious global market. Through strategic measures, India can safeguard its economic interests while contributing to a sustainable future.

Mains Question:

1. Discuss the potential challenges and implications of the European Union’s Carbon Border Tax (CBAM) on India’s exports, especially in sectors like steel and aluminum. Also, analyze the suggested strategies for India to respond to CBAM, taking into consideration the economic and environmental aspects. (150 Words)