Europe’s Carbon Burden

Context:

The European Union’s (EU) recent announcement of a gradual implementation of the carbon border adjustment mechanism (CBAM) is viewed as resurgence due to inherently unequal trading system. India has to innovate its pricing policy to counter EU's carbon tax.

EU’s carbon border adjustment mechanism (CBAM):

• Is a Climate initiative: The CBAM is a step to mitigate the effects of climate change that include an emission trading system used to price emissions.
• Addressing climate cause: Carbon leakage has compelled the EU to supplement its “Fit for 55 Agenda” with a levy on imports from countries that do not price carbon.
• Justified trade taxation: The EU’s regional trade is significant but the composition of trade in specific commodities and services is not EU dominated. For example, Turkey, Russia, South Korea, India and China are the top five sources of steel imports for the EU.

Concerns:

• Major products are included under taxation: Aluminum imports along with cement, fertiliser, electricity and hydrogen will be covered under the initial phase of the CBAM.
• Shifting of Companies: As the EU ramps up its efforts to withdraw free allowances in the system, there is a worry that businesses will relocate to jurisdictions with no such comparable regulations.
• Can lead to Production shortages: CBAM will apply to aluminum even as the EU lists it as a critical mineral and struggles to lift its production.

India’s Response:

• India should prepare its small business: With limited fiscal space, an internal carbon market will nudge firms and can also support consumers and smaller businesses.
• India should align its carbon goals with CBAM: Such pricing mechanisms can also work as a tool to negotiate equivalence with the CBAM, which would mean that India can price carbon differently as per its level of development.
• Preparing its manufacturing sector: CBAM raises more serious concerns on the structure of the manufacturing sector that will be dominated by companies and countries that are able to withstand the winds of change.