At the two-day G-20 ministerial meeting on environment and climate change in Italy, developing countries, including India, are expected to raise their concerns over the European Union’s recent proposal on the first of its kind carbon border tax.
Under this proposal, the 27 EU nations will impose border tax on imports of carbon-intensive goods.
The tax plan, yet to be legally formalized, will come into force from 2026.
On similar lines, Democratic lawmakers in USA, earlier this week, introduced a legislation establishing a carbon tariff on certain imports like steel as a means to fight climate change.
What exactly is a carbon border tax?
Carbon border tax is the European Union’s sweeping new plan to tackle climate change and if adopted would be the first of its kind.
It is a carbon tariff on imports from countries that aren’t taking similarly aggressive steps to slash their own planet-warming greenhouse gas emissions.
What is the need for Carbon border tax?
Suppose a country tries to impose policies, like Carbon tax, to cut emissions domestically. This will increase the cost of its goods (for ex: steel and cement factories) that will now be at a disadvantage to foreign competitors that are based out in nations having looser environmental rules.
In such situation steel and cement production shifts overseas to that country where the environmental conditions are liberal, which will enable them to cut costs & increase profits.
Such an event would undercut the climate policy, since those foreign factories would be emitting just as much or more carbon dioxide elsewhere.
In theory, a carbon border tax could help prevent that undercutting.
If factories all over the world that wanted to sell steel, cement, aluminum or fertilizer to the EU had to pay a surcharge for the pollution they emit, they would have incentive to clean up their act too.
Companies within Europe would have less incentive to shift operations overseas. And, if other countries adopted similar rules, that could put pressure on nations that are reluctant to curb their use of fossil fuels.
Under the EU’s proposal, importers of carbon-intensive products such as steel, cement, fertilizers and aluminum will have to pay the carbon border tax.
It will soon be legally adopted by 27 nations as part of the EU’s programme to meet its new climate target of cutting greenhouse gas emission by 55% by 2030 from 1990 levels.
Why do developed countries want to impose such a tariff?
For two reasons: its environmental goals and its industries’ global competitiveness.
Recently, the EU declared it would cut its carbon emissions by at least 55% by 2030 compared to 1990 levels.
EU’s greenhouse gas emissions have fallen by 24% compared to 1990 levels.
But imports from emissions which contribute 20% of the EU’s carbon dioxide emissions are increasing.
Such a carbon tax would incentivize other countries to reduce GHG emissions and further shrink the EU’s carbon footprint.
Secondly the 27 EU member states have much stricter laws to control GHG emissions.
It has an ‘Emissions Trading System’ that caps how much GHG individual industrial units can emit; those that fail to cap their emissions can buy ‘allowances’ from those who have made deeper cuts.
This makes operating within the EU expensive for certain businesses, which, the EU authorities fear, might prefer to relocate to countries that have more relaxed or no emission limits.
This is known as ‘carbon leakage’ and it increases the total emissions in the world.
Why are developing nations opposed to the idea?
India has always held a view that any such unilateral carbon border adjustment will be discriminatory and against the principles of equity and CBDR-RC (common but differentiated responsibilities and respective capabilities).
How does this impact India?
As India’s third-largest trading partner, the EU accounted for €62.8 billion ($74.5 billion) worth of trade in goods in 2020, or 11.1% of India’s total global trade.
India’s exports to the EU were worth $41.36 billion in 2020-21, as per data from the commerce ministry.
The EU’s March resolution stated that to begin with, by 2023, the CBAM would cover energy-intensive sectors such as cement, steel, aluminum, oil refinery, paper, glass, chemicals as well as the power sector.
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 a large greenhouse gas footprint–and a new source of disruption to a global trading system already roiled by tariff wars, renegotiated treaties, and rising protectionism.
It is estimated that a levy of $30 per metric ton of CO2 emissions could reduce the profit pool for foreign producers by about 20% if the price for crude oil remained at $30-40 per barrel.
Way forward:
Such a mechanism to charge imported goods at borders may spur adoption of cleaner technologies.
But if it happens without adequate assistance for newer technologies and finance, it would amount to levying taxes on developing countries.
Richer countries must make good on their promises of technological and financial assistance to enable developing countries to make the transition to low-carbon pathways for growth.
There is disagreement on whether developed countries have kept their climate finance commitments with conflicting claims from countries, according to this 2021 editorial published in the journal Nature.
Can you attempt these questions now?
“Unilateral carbon border adjustment will be discriminatory and against the principles of equity and CBDR-RC (common but differentiated responsibilities and respective capabilities)”. Discuss.
What is a carbon border tax? Also mention the reason behind India’s opposition to carbon tax.
