Syllabus: GS-III, Economy;
Subject: International relations, Environment and Ecology;
Topic: Agreements involving India and/or affecting India’s interests, Global Agreements and Efforts;
Issue: CBAM;
Context: The Centre is exploring a range of relief measures to soften the blow of the carbon tax introduced by the European Union and the UK, which includes offering compensation to exporters affected by the tax to help them remain competitive in the global markets,.
Synopsis:
What is Carbon Border Adjustment Mechanism?
- A carbon border tax is an import duty based on the amount of carbon emissions produced by the goods in question.
- It discourages emissions as a carbon price, and it has an impact on production and exports as a trade-related measure.
Stated goal of CBAM:
- To eliminate the difference in carbon price paid by companies subject to the EU’s Emissions Trading System (ETS) and the price paid by companies elsewhere.
- Levelling the playing field for EU firms.
- To implement stronger emission reduction efforts.
- Incentivises non-EU countries to increase their climate ambition.
- It will ensure that EU and global climate efforts are not undermined due to the relocation of production which is defined as ‘carbon leakage’.
Concerns:
- From an equity perspective, it increases costs in poorer countries, due to the need to remit new taxes, etc.
- Such schemes are still rare in most of the world and introducing them will be a major policy challenge for lower-income countries.
- For countries reliant on one of the targeted industries – like Mozambique’s aluminium extraction, this could be a major economic shock.
- If enacted unilaterally, it is likely to unfairly protect domestic industries from international competition – a practice known as ‘green protectionism.’
- BASIC countries have emphasised that carbon border taxes could promote market distortion and worsen the trust deficit among countries.
What are the impacts on India?
- High CBAM – The share for many Indian exports covered under CBAM going to the EU is high.
- Less market share – Indian firms risk losing market share to EU-based producers or those in other more carbon-efficient nations.
- Affects exports – CBT will affect substantial exports as the EU is an important trade partner for India.
- Expensive – Even though a product from India may be cheaper than an American product tax plus product price will make Indian products more expensive.
- Trade divisions – CBT will lead to sharper trade diversion and more trade among developed countries.
