Green crosshairs: On the impact of the European Union’s Carbon Border Adjustment Mechanism  

A multi-pronged counter is warranted to tackle the European Union’s carbon tax plans  

May 10, 2023 12:20 am | Updated 12:20 am IST

Starting this October, the European Union (EU) proposes to introduce a framework for levying a carbon tax on imports of products that rely on non-green or sub-optimally sustainable processes and where carbon emissions are deemed to have not been adequately priced. This Carbon Border Adjustment Mechanism (CBAM) will begin with an import monitoring mechanism and culminate in the levy of duties as determined from January 2026. The EU argues that the CBAM will ensure its climate objectives are not undermined by carbon-intensive imports and spur cleaner production in the rest of the world. This poses a significant threat to some of India’s biggest exports to the trading bloc, including iron ore and steel, with carbon levies estimated to range from 19.8% to 52.7%. During a visit to France in early April, Commerce and Industry Minister Piyush Goyal said it was too early to gauge the tax’s impact on Indian exports, as operational clarity was yet to emerge. By last Thursday, top trade officials were more assertive and termed tackling this risk as one of the top items on the government’s agenda, with several options being explored.

It is critical that the Centre reacts with greater alacrity to what may be considered by some as a sophisticated trade barrier doused in ‘greenwashing’ optics, proposed by the EU. Last year, about a third of India’s iron, steel and aluminium exports, for instance, were shipped to EU members. Engineering products, the largest export growth driver in recent years, would be impacted too. Larger players across sectors are gradually turning to greener technologies, but the transition needs time — even more so for smaller businesses — to move away from legacy carbon-heavy technologies (such as blast furnaces for steel making). The EU believes the carbon tax is compatible with World Trade Organization norms, but India is looking to challenge that. It may also flag the incompatibility with the UN’s climate change framework which moots common but differentiated responsibilities for developed and developing nations. But even if these arguments are upheld, these two avenues lack enforcement options. So, a threat of retaliatory tariffs on EU imports is also being weighed even as plans are afoot to quantify the various carbon taxes levied in India. Having positioned itself as the voice of the global South, India must play that part to the hilt while at the helm of the G-20 this year and galvanise other nations to take on the EU’s carbon tax framework. This championing need not revolve around its own concerns, but the far worse implications the CBAM entails for poorer countries, many of whom rely more heavily on mineral resources than India does.

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