Context

• Recently, Finance minister mentioned “climate tariff walls” as a potential cost. After European Union agreed to implement the Carbon Border Adjustment Mechanism (CBAM),

What is a carbon border tax?

• A duty on imports based on the amount of carbon emissions produced by the product in question is known as a carbon border adjustment tax.

  

• As a cost on carbon, it discourages emissions.
• It has an impact on exports and production as a trade-related measure.
• The European Green Deal, which aims to make Europe the first continent to be climate neutral by 2050, includes the proposal. A border carbon tax is likely superior to a national carbon tax.
• Any business in the country that uses fossil fuels must pay a fee known as a national carbon tax.

Carbon Border Adjustment Mechanism

• In 2021, the EU introduced the Carbon Border Adjustment Mechanism.
• According to the website of the European Commission, “Designed in compliance with World Trade Organization (WTO) rules and other international obligations of the EU, the CBAM system will work as follows: EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer.”
• It is one of the measures to help the EU reduce its emissions by 55% by 2030 from 1990 levels. Iron and steel, electricity, cement, aluminium, and fertilizer are all subject to the CBAM tax. 

Reason for implementing CBAM

• For the European Union (EU), climate policies in other countries remain “less stringent,” and there is a possibility of “carbon leakage.” 
• This refers to the possibility that EU-based businesses could shift emission-intensive production to jurisdictions with lax standards, or that EU products could be replaced by imports that are less expensive but use more carbon. 
• As a result, the CBAM acts as a “price equalizer.” Further, the EU sees it as an alternative to free allowances in its Emissions Trading System (ETS), which addresses leakage but does not encourage environmentally friendly production within the EU, says Financial Express analysis.

What is the issue?

• In a joint statement, Brazil, South Africa, India, and China criticized the EU’s proposal as “discriminatory” and contrary to equity and “Common but Differentiated Responsibilities and Respective Capabilities” (CBDR-RC).
• In order to combat climate change, these principles acknowledge that richer nations have a duty to provide technological and financial support to developing and vulnerable nations.
• India’s third-largest trading partner is the EU. This tax could reduce demand and make Indian goods less appealing to consumers in the EU by raising their prices. Companies with a larger greenhouse gas footprint would face significant challenges in the near future as a result of the tax.
• The CBAM puts the burden of climate action on them, while the rich countries have contributed the most to warming.
• However, India is considering policies that could assist Indian exporters to the EU in reducing such costs, according to the FM’s most recent interaction with the industry.

Source: India Times

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