India, China, Brazil, South Africa opposes ‘carbon border tax’ at COP27

On the concluding sessions of the 27^th edition of the Conference of Parties (COP), a consortium of countries that includes India has jointly stated that carbon border taxes could result in market distortion and aggravate the trust deficit among parties.

• The European Union has proposed a policy called the ‘Carbon Border Adjustment Mechanism’to tax products such as cement and steel that are extremely carbon intensive which is going to effect from the 2026 called ‘Carbon Border Tax’.
• BASIC, a group constituting Brazil, India, South Africa, and China the large economies that are significantly dependent on coal, has for several years voiced common concerns and reiterated their right to use fossil fuel.
• BASIC countries call for a united solidarity response by developing countries to any unfair shifting of responsibilities from developed to developing countries.

What is the Carbon Border Adjustment Mechanism?

• On 14 July 2021, the European Commission published its proposal for a regulation establishing a carbon border adjustment mechanism (CBAM).
• The core element of the CBAM is the obligation to pay for the greenhouse gas (GHG) emissions embedded in certain carbon-intensive products imported into the European Union (EU) through the purchase of so-called CBAM certificates.
• The CBAM is conceived as a measure against the risk of carbon leakage, a phenomenon whereby companies move their production abroad to avoid the costs of complying with stringent environmental standards domestically or import cheaper foreign products that were not subject to a carbon price in their country of production.

Causes behind Imposing Carbon Tax:

• EU and Climate Change Mitigation: The EU has declared to cut its carbon emissions by at least 55% by 2030 compared to 1990 levels. To date, these levels have fallen by 24%.
  • However, emissions from imports contributing to 20% of the EU's CO2 emissions are increasing.
  • Such a carbon tax would incentivize other countries to reduce GHG emissions and further shrink the EU's carbon footprint.
• Carbon Leakage: The Emissions Trading System of the EU makes operating within the region expensive for certain businesses.
  • The EU authorities fear that these businesses 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.
• Benefit for Certain Countries: Countries that have already introduced carbon trading systems in their own countries will be benefitted from this initiative.
  • These industries of these exporting countries can claim a rebate equal to the amount of tax that they have already paid.

Impacts of Carbon Tax:

• Worst Affected Countries: The countries to be worst affected will be Russia, Britain, Ukraine, Turkey, and China which collectively export large amounts of fertilizer, iron, steel, and aluminum to the European Union.
  • The United States sells significantly less steel and aluminum to Europe, but could also see an impact.
• Impact on India: The EU is India's third-largest trading partner. Increasing the prices of Indian-made goods in the EU, this tax would make Indian goods less attractive to buyers and could shrink demand.
  • The tax would create serious near-term challenges for companies with larger greenhouse gas footprints.
• Change in the Climate-Change Regime: The greenhouse content of these imports would also have to be adjusted in the greenhouse gas inventories of the importing countries which essentially implies that GHG inventories would have to be reckoned not on the production basis but at the point of consumption basis.
  • This would turn the entire climate change regime upside down.
• A Protectionist Policy: The policy can also be regarded as a disguised form of protectionism.
  • Protectionism refers to government policies that restrict international trade to help domestic industries.
  • Such policies are usually implemented with the goal of improving economic activity within a domestic economy.