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Centre looks into options to counter EU’s carbon tax plan

Published: 11th May, 2023

Context

The Commerce Ministry is exploring various options to cope with the European Union’s decision to introduce a Carbon Tax, including retaliatory tariff measures, a challenge at the World Trade Organisation and measures to help smaller Indian exporters.

What is EU’s Carbon Tax?

  • To combat carbon leakage, the EU is embarking on an experiment that would expand its climate change policies to imports.
  • The policy is called Carbon Border Adjustment Mechanism ('CBAM') alias Carbon Border Tax which imposes importers and non-EU manufacturers to pay for the carbon emission linked to the goods they sell within EU limits.
  • Starting January 2026, the Indian steel, cement, aluminium, and fertiliser industries will pay steep Carbon Border Tax (CBT) imposed by the European Union (EU).
  • The CBAM will walk on the footprints of ETS, i.e., importers will be required to purchase carbon import certificates/ permits for each metric ton of CO2 brought into the EU through specified goods.

EU’s Emission Trading System (ETS)

  • Launched in: 2005
  • It is a long-standing greenhouse gas emissions trading scheme
  • The European Commission, in 2020, had approved a set of revitalised policies, collectively named "The European Green Deal", with a primary objective to curb climate change by dipping carbon emissions by EU nations in a phased manner, striving to become a net-zero emitter of greenhouse gases, by the year 2050.

How would EU’s Carbon Tax impact India?

  • Higher taxes: Steel and aluminium sectors have high emission intensity and hence would attract high taxes.
  • The EU buys half of its $60 billion in steel from five countries — China, Russian Federation, Turkey, India, and South Korea.
  • Many Indian firms use electric arc furnaces, a more carbon-efficient process.
  • The tax is zero if steel is made using green hydrogen as fuel and a reducing agent.
  • Risk of losing market share: Indian firms risk losing market share to EU-based producers or those in other more carbon-efficient nations. CBT will affect substantial exports as the EU is an important trade partner for India.
  • Increasing cost of export: CBT will increase the cost of exporting steel, cement, aluminium, fertilisers, and electricity from India to the EU.

Why the burden would be more on developing countries (like India)?

China, the world’s biggest greenhouse gas emitter, has opposed the CBAM as a trade barrier, while it is also planning to develop its own emissions trading market.

  • Expensive affair for developing nations: CBT will depend on the carbon price paid in the home country and the production process Since most developed country industries would pay high carbon prices in their home countries, the tax rate will be zero or low.
  • Trade diversion: CBT will create FTA-like trade diversion effect. Even though a product from India may be cheaper than an American product, tax plus product price will make Indian products more expensive. This will lead to the EU firms sourcing more from developed countries. Thus, the trade will divert to costlier suppliers.

How India can switch to low carbon process?

  • The three steelmaking processes with progressively lower emission intensity are
    • Blast furnaces using iron ore and coal/coke
    • Electric arc furnace using steel scrap as inputs and electricity
    • Using hydrogen in a “direct reduction” process that converts iron ore to metallic iron for feeding into an electric arc furnace

What are the ‘Green Hydrogen’ challenges for India?

  • Green hydrogen is produced from renewable energy sources.
  • Using green hydrogen in steel plants can significantly reduce the carbon emissions of steelmaking, as it eliminates the use of coal and coke.
  • Challenges: However, it faces challenges, such as:
    • scaling up the production and supply of green hydrogen
    • deploying the direct reduction technology that can use 100 per cent hydrogen as a reducing agent
    • ensuring the safety and reliability of hydrogen transport and storage
    • investing in the infrastructure and equipment for green hydrogen production and use
    • competing with the low-cost conventional steelmaking based on coal and coke
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