World has already witnessing the implications climate change, however, the global action on climate change has been slow. 196 countries of the world came together to sign what is known as Paris Climate Accord at the United Nations Climate Change Conference held in Paris, France in 2015. The agreement is to limit temperature rise to less than 2 degrees Celsius above pre-industrial levels by bringing emissions to net zero by the second half of the century.
However, a progress report from February 2021 showed little progress had been made in this direction. So in July 2021, to boost climate change mitigation efforts European Union (EU) proposed a comprehensive plan which includes a ‘Carbon Border Tax’ on imports of carbon-intensive goods.
A carbon border tax is a tax on carbon emissions attributed to imported goods that have not been carbon-taxed at source. In pushing through policies that result in EU manufacturers relying on environmentally friendlier but more expensive renewable energy, the manufacturers would be at a cost disadvantage compared with overseas competitors that are still using carbon dioxide-producing but cheaper power sources.
The plan includes a Carbon Border Adjustment Mechanism (CBAM), which aims to equalize the fees on the carbon content of goods in the EU regardless of where they were produced by imposing carbon border taxes. Under the proposal, importers will be required to buy digital certificates representing the tonnage of carbon dioxide emissions embedded in their imported goods. Importers may be able to claim a reduction in carbon border costs if the goods have already been subject to a carbon levy in their country of manufacture.
The EU’s CBAM proposal contains various controversial aspects. For example: how to fairly account for emissions related to the production of imported goods? How to duly consider the costs that companies already face in complying with climate regulations in exporting countries?
The China, India, Brazil, South Africa and several others, including least-developed countries, have expressed concern over the EU’s CBAM. The BASIC (Brazil, South Africa, India and China) countries’ grouping has termed the policy as ‘discriminatory’ and against the principles of equity and ‘Common but Differentiated Responsibilities and Respective Capabilities’ (CBDR-RC).
‘Common but Differentiated Responsibilities and Respective Capabilities’ (CBDR-RC) principles acknowledge that richer countries have a responsibility of providing financial and technological assistance to developing and vulnerable countries to fight climate change.
Impact on India
A carbon border tax is worrisome for India as it is the EU’s third largest trading partner. In 2020, the EU accounted for 11.1 per cent of India’s total global trade. India’s exports to the EU were also worth $41.36 billion in 2020-21, according to data from the commerce ministry.
By increasing the prices of Indian-made goods in the EU, this tax would make Indian goods less attractive for buyers and could shrink demand. The tax would create serious near-term challenges for companies with larger greenhouse gas footprint.
A mechanism like Carbon Border Tax for charging imported goods at borders may spur adoption of cleaner technologies. But if it happens without adequate assistance for newer technologies and finance, it would rather become disadvantageous for the developing countries.
India should diligently work towards reducing its Carbon foot print, not only to protect its future trade but as a measure to mitigate climate change in the country and world at large. While India prepares to reduce its Carbon footprint, in short term, it is should negotiate with EU to to ensure that its exports with the latter are protected either through a Free Trade Agreement or by other means and if there are adjustments and standards that India needs to meet.