By Aaiysha Topiwala (third year undergraduate student at Gujarat National Law University - India) 

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As the world grapples with the rising frequency of catastrophic climate effects, all the nations have realized the urgent need for global efforts to tackle the mammoth challenge of climate change. In this scenario, the European Union (EU) has emerged as an environmental leader at the global level. The environmental laws and policies adopted by the EU are considered one of the most ambitious policies in the world. The recent policy brought out by the EU last year is yet another proof of its determination to remain at the forefront of tackling climate change. The European Parliament, in July 2021, announced that it would levy a carbon border tax on all imported carbon products. After almost a year of the announcement of this policy and with less than half a year left for the transition period set to begin in 2023, it becomes essential to revisit this policy and determine its effect on India along with the possible solutions.

The European Parliament in 2019 had declared a climate emergency and subsequently, in January 2020, it adopted the European Green Deal Policy. This package outlined the ambitious policies of the European Parliament which are aimed at reducing carbon emissions by 55% by 2030 compared to 1990. This policy also sought for the EU to become a climate neutral continent by the end of 2050. In furtherance of the same, last year in July of 2021, it announced a package to achieve its climate targets. It proposed an array of legislative proposals which are aimed at reducing greenhouse gas. Among these proposals the most significant measure proposed is the Carbon Border Tax Mechanism (CBAM). CBAM is essentially a tax that will be imposed on imported goods and is aimed at promoting more climate-friendly goods in developing countries. According to this policy, the imported goods will pay a price which will be at par with the price paid by the domestic producers of the EU for their carbon emissions. This policy will help discourage energy-intensive production in developing countries, thereby helping reduce greenhouse gas emissions at the global level. In simple words this policy uses an economic approach to minimize the effects of global climate change.

1. Carbon Border Adjustment Mechanism

As mentioned above, the EU has a very ambitious and stringent carbon tax, often resulting in EU-based companies with intensive carbon production moving to countries with lax standards. This leads to carbon leakage, thus ultimately undermining the EU’s climate objectives. It is argued that CBAM is a climate measure that is aimed at preventing these said carbon leakages in compliance with the rules of the World Trade Organization and other international obligations of the EU. The policies mentioned in CBAM are made in consultation with different organizations and stakeholders. CBAM, by equalizing the carbon price between imported and domestic goods, ensures that the EU’s climate objectives are not compromised by companies moving their production to countries with less stringent policies. This policy will come into force in 2026 and an initial transition period of three years will be given to companies and trading partners starting from 2023. During this transition period, CBAM will only apply to selected goods and certain specific heavy industries which are deemed as emitting high GHG. These selected products are aluminum, steel, cement, fertilizers and electricity. By the end of the transition period, the scope of CBAM may extend to more products and services and importers will start paying financial adjustments.

2. Working of CBAM

The system of CBAM will be similar to ETS, the EU’s flagship policy to combat climate change, wherein the importers will be required to purchase certificates. The amount of these certificates will be calculated on the basis of the weekly average auction price in the EU carbon credit market expressed in terms of €/ tonne of CO2 emitted. In simpler terms, the carbon certificate for the carbon price of imported goods will be decided equivalent to goods produced locally in the EU.

The equivalent price will be deducted from the importer if they show that they have already paid the carbon price in their jurisdiction. It is believed that this will reduce the risk of carbon leakage and encourage the producers in other countries to green their processes.

Though CBAM will apply to all countries, a few of them are exempted from it. These are those countries that are already participating in the EU ETS or have an emission system similar to and connected to the EU’s.

EU has been a significant export market for India and the third largest trading partner in the year 2020. The trade between India and EU has increased by 30% since the last decade, accounting for around 11% of India’s global trade.  In 2020 alone, India’s exports to the EU were worth € 33 billion. The European Commission’s report on impact of CBAM mentioned India as the “eighth largest exporter of iron and steel and the twelfth largest exporter of aluminum to the EU.” The implementation of CBAM will have a significant impact on India’s exports to the EU. CBAM will only impose financial and administrative burdens on the Indian goods, making them expensive and less attractive for buyers, leading to a shrinking demand. As per the forecast of UNCTAD, “India is at risk of losing around USD 1 billion in exports of energy- intensive products such as steel and aluminum.” It will also affect the trade of energy intensive products of India. It is therefore, along with other nations such as BRICS (Brazil, Russia, India, China and South Africa), at the forefront of opposing this policy. India has questioned its compatibility with the WTO rules. As opposed to EU’s claim of CBAM being in compliance with WTO rules India has argued CBAM is inconsistent with WTO rules. It is inconsistent with EU’s WTO obligations, WTO’s rule of non-discrimination and with the national treatment rule of WTO. India has also raised the concern of CBAM going against the principle of “Common but differentiated responsibilities.”

According to this principle, developed countries have an obligation toward developing countries with regard to providing financial and technological assistance to combat climate change. There is no adequate assistance from the developed countries apropos technology and finance. This policy is discriminatory in nature and will ultimately put a burden on developing countries like India. Moreover, it is still unclear how the EU will assess the imported products. This might make it difficult for small businesses to quantify their emissions.

But despite these implications, this is an excellent opportunity for India to adopt greener technologies. Moreover, it might be in India’s favour to engage on the issue of CBAM and its implementation with the EU. India at COP26 has committed to achieve Net Zero emissions by 2070 and promised to reduce its carbon emission by 1 billion tones by 2030. By preparing for this policy India, will also be able to achieve its targets. In the long run, other countries are expected to adopt similar policies with US already proposing its version of CBAM. It will also be a challenging task to recover the lost customer base of EU CBAM. Thus, India should not see CBAM as an obstructionist policy but rather as an opportunity to achieve its international environmental goals and devise other ways to tackle it.

3. Way forward for India

Even though the potential harms presented at the outset by CBAM, India must take its step carefully and assess its current relationship with EU. India has both trade and service surplus in the EU and thus, it needs to protect this market. EU is open to dialogue and cooperation with developing countries that will be affected by this decision. India should seize this opportunity and enter into different potential dialogue areas. It could go for more acceptable asks of recognition of domestic carbon pricing measures.

Moreover, the need of the hour for India is to start setting up its own carbon trading system. This is because EU is just the pioneer. Many other countries have supported this idea and are aiming to implement a similar policy in the future with US already leading the way. With over a year left for the transition phase to begin, it is high time for India to start preparing for the same. It should start by preparing its industries for the same. Indian industries can enter into cleaner technology partnerships with EU.

In addition to this, India should also shift its focus on using renewable energy. Even though the EU is a significant market for India, it should start preparing to diversify other export markets for its products. Although CBAM may seem obstructionist it, may help harmonize carbon prices in the long term. Simultaneously, this might be a golden opportunity for India to transform its energy landscape, move towards more green technology and emerge as a strong player in world trade in the future.

Picture credits: Alena Koval on Pexels.com.