INTRODUCTION
The European Union ranks as India’s third-biggest trading partner, making up 10.8% of all Indian commerce in 2021 with a value of €88 billion in products exchanged. India makes up 2.1% of all goods traded within the EU, making it the tenth-largest trading partner.[1] The European Union has always advocated for the importance of the conservation of the environment from the perils of industrial development. The EU announced its commitment to reduce emissions by 43% by 2030 and reach net zero emissions by 2050.[2] The European Union also adopted Climate Law in 2021, imposing obligations on the EU to attain climate neutrality by 2050 and establishing a goal of lowering net greenhouse gas emissions by at least 55% by 2030 as compared to 1990 levels.[3] Thus, in line with these objectives, the European Union has introduced the Carbon Border Adjustment Mechanism (CBAM) to ensure Carbon-intensive imports do not undercut climate aims; on the contrary, they encourage cleaner production in other parts of the world.
WHAT IS CBAM
CBAM is a component of the EU’s “Fit for 55 in 2030 package,” which aims to comply with the European Climate Law by reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.[4] The Carbon Budget Adjustment Mechanism (CBAM) is a policy instrument designed to lower carbon emissions by guaranteeing that imported commodities bear the same carbon expenses as those made in the European Union. Here, carbon expenses mean tariffs on commodities that are carbon-intensive. Carbon-based import tariffs are levied on imports in proportion to the quantity of carbon emissions generated during the production process of the imported goods. Commencing in 2026, CBAM will levy a carbon price on several imported items, including cement, aluminium, iron and steel, electricity, and fertilizers.
IMPACT ON INDIA
While the European Union has claimed that the policy is essential for environmental protection, it has raised concerns for developing nations like India. These issues are multi-faceted ranging from concern that are objective to moral grounds. Objective grounds include increased cost reduced competitiveness, and violation of FTA norms moral grounds include climate justice, the policy of gradual green transition etc.
- Increased Cost and reduced competition
The CBAM will impose a 25-30% tax on select imported goods. Iron, steel, and aluminium products, as well as pelletized iron ore, account for 26.6% of India’s exports to the EU. CBAM is going to affect these products. India exports these commodities to the EU for about USD 8 billion a year.[5] CBAM will increase the price of these commodities. It should also be kept in mind that the developed nations have a better-developed infrastructure to produce carbon-free goods, which places them in a better position to tackle the CBAM. Therefore, an equal tax regime for both developing and developed nations will ultimately result in developing nations exiting the European market.
- Undermining the Free Trade Agreement
The CBAM taxation system can be viewed as a kind of non-tariff barrier which is explicitly declared illegal by the World Trade Organization (WTO).[6] WTO, however, allows non-tariff measures like anti-dumping measures, etc. Moreover, CBAM should be criticized for undermining zero-duty Free Trade Agreements (FTAs) by acting as a non-tariff barrier.[7] Contrary to popular belief, India pays the fee while permitting duty-free entrance for purportedly “green” goods from EU member states. Thus, India expects reciprocal trade relations with the European Union but so can’t be seen with the CBAM policy of the European Union.
- Against the commitment of Holistic Green Transition
The European Union and the developed nations have time and again shown support for a holistic transition to green energy by considering the interests of the developed and the developing nations. In an open letter by prominent world leaders of the West, it was said, “We believe that just ecological transitions that leave no one behind can be a powerful force for alleviating poverty and supporting inclusive and sustainable development.”[8] Thus, the CBAM undermines their commitment to symbiotic development by levying taxes on the developing and the underdeveloped nations.
- Principle of Climate Justice
Throughout history, there has been an unequal exploitation of resources by different nations. According to the Center for Global Development, developed countries are responsible for 79% of historical carbon emissions.[9] Thus, climate justice says that the nations which have enjoyed natural resources at the expense of the environment should have the onus of repaying those damages. This can also be understood as the common but differentiated responsibility principle as expounded in the Paris Agreement. This can also be traced to the Conference of Party 27 in Sharm El-Sheikh where India opted for phasing down carbon emissions rather than phasing out carbon emissions.[10] Thus, an instant transformation which the CBAM is sorting to bring will not be in the interest of developing nations like India and would be against climate justice.
SOLUTIONS AND SUGGESTIONS
The Carbon Border Adjustment Mechanism is an issue that must be dealt with and can’t be avoided, as more and more developed nations are coming up with such taxes. The United Kingdom has also decided to enforce its own CBAM by the year 2027. India should take three steps to tackle CBAM. Firstly, India should heavily criticize and oppose CBAM in international forums asking for a change, the reason being it opposed the principle of climate justice, common but differentiated responsibility, equity etc.
The second step shall be devising alternative mechanisms. India can also impose a similar tax on imported goods from the European Union. According to the United Nations COMTRADE database, the European Union’s exports to India in 2022 were US\$49.76 billion. In 2021, the EU was India’s third largest trading partner, accounting for 10.8% of India’s total trade.[11] The revenue generated by this tax can then be utilized to counter the tariff levied as CBAM this can also be used for the development of greener technologies. Further, India can look for different and more diverse export avenues to decrease its dependence on the European Union.
THE SILVER LINING
Ultimately, India can take advantage of the opportunities presented by the CBAM by turning the stones necessary to transform its production processes into more sustainable and environmentally friendly ones. Cleaner production incentives not only support international environmental objectives but also put India in a competitive position for the future. This will also contribute to India’s long-term aims to reach net zero emissions by 2070 and to meet fifty per cent of its electricity requirements from renewable energy sources by 2030.
CONCLUSION
The Carbon Border Adjustment Mechanism or the CBAM acts as alarming bells to act upon the current situation. To protect its industries from any negative repercussions, India needs to come up with and quickly adopt carbon taxing policies that are in line with the principles of the Paris Agreement. India Should work in furtherance of its own Carbon Credit Trading System (CCTS) which was introduced by amending the Energy Conservation Act in 2022.[12] In addition to the Green Credit Programme Rules, which promote environmentally conscious activities beyond carbon reduction, the Ministry of Power is working on the details to operationalise the CCTS in India. The purpose of the CCTS is to encourage investments in clean energy while also reducing emissions. Thus, it can be held that CBAM can’t be avoided but needs to be tackled head-on which can ne done by various methods as explained above ultimately the need of the hour is to move towards greener energy to prevent the earth from the perils of the climate change.
Author(s) Name: Kinshuk Agarwal (Symbiosis Law School Pune)
Reference(s):
[1] ‘EU-India Free Trade Agreement, Investment Protection Agreement and Geographical Indications Agreement’ (European Commission) <https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/india/eu-india-agreement_en#:~:text=The%20EU%20is%20India’s%20third,EU%20total%20trade%20in%20goods.> accessed 20 January 2024
[2] ‘EU at COP28 Climate Change Conference’ (European Commission) <https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/climate-action-and-green-deal/eu-un-climate-change-conference/eu-cop28-climate-change-conference_en#:~:text=Key%20commitments%20and%20actions%20announced,net%20zero%20emissions%20by%202050> accessed 20 January 2024
[3] Maria-Mirela Curmei and Christian Kurrer, ‘Environment policy: general principles and basic framework’ (Fact Sheets on the European Union European Parliament, October 2023) <https://www.europarl.europa.eu/factsheets/en/sheet/71/environment-policy-general-principles-and-basic-framework#:~:text=In%202021%2C%20the%20EU%20Climate,2030%2C%20compared%20to%201990%20levels.> accessed 20 January 2024
[4] ‘Carbon Border Adjustment Mechanism (CBAM) starts to apply in its transitional phase’ (European Commission, 29 September 2023) <https://ec.europa.eu/commission/presscorner/detail/en/ip_23_4685> accessed 21 January 2024
[5] Ankur Gupta and Samyak Jain, ‘Zoomed Out | Balancing Trade and Climate Goals — these are the impacts of EU’s Carbon Border Adjustment Mechanism on India’ (CNBC TV 18, 30 November 2023) <https://www.cnbctv18.com/world/eu-cbam-balancing-trade-and-climate-goals-impacts-on-india-carbon-border-adjustment-mechanism-18440461.htm> accessed 22 January 2024
[6] ‘Using all platforms to flag non-tariff barriers impacting trade: Commerce Secretary Sunil Barthwal’ (The Economics Times, 19 August 2023) <https://economictimes.indiatimes.com/news/economy/foreign-trade/using-all-platforms-to-flag-non-tariff-barriers-impacting-trade-commerce-secretary-sunil-barthwal/articleshow/102838376.cms?from=mdr> accessed 22 January 2024
[7] ‘India must strategise against EU carbon tax’ (Business Line, 22 October 2023) <https://www.thehindubusinessline.com/opinion/editorial/india-must-strategise-against-eu-carbon-tax/article67449523.ece#:~:text=CBAM%20is%20a%20blatant%20non,also%20a%20huge%20compliance%20headache&text=The%20EU’s%20plan%20to%20collect,experts%20seized%20of%20the%20matter.> accessed 22 January 2024
[8] Mia Mottley, Luiz Inácio Lula Da Silva, Ursula von der Leyen, Charles Michel, Emmanuel Macron, Olaf Scholz, Fumio Kishida, William Ruto, Macky Sall, Cyril Ramaphosa, Mohammed bin Zayed Al Nahyan, Rishi Sunak and Joseph Biden Jr., ‘A green transition that leaves no one behind’ (European Commission, Paris Summit) <https://ec.europa.eu/commission/presscorner/detail/en/AC_23_3426> accessed 24 January 2024
[9] ‘Developed Countries Are Responsible for 79 Percent of Historical Carbon Emissions‘ (Centre for Global Development) <https://www.cgdev.org/media/who-caused-climate-change historically#:~:text=Developed%20Countries%20Are%20Responsible%20for,Global%20Development%20%7C%20Ideas%20to%20Action> accessed 24 January 2024
[10] Soumya Sarkar, ‘Many nations join India’s call to phase down all fossil fuels’ (Mongabay, 16 November 2022) <https://india.mongabay.com/2022/11/many-nations-join-indias-call-to-phase-down-all-fossil-fuels/> accessed 24 January 2024
[11] ‘European Union Imports from India’ (Trading Economics) <https://tradingeconomics.com/european-union/imports/india#:~:text=European%20Union%20Imports%20from%20India%20was%20US$70.88,United%20Nations%20COMTRADE%20database%20on%20international%20trade.> accessed 25 January 2024
[12] Manas Agarwal, ‘Carbon Credit and Trading Scheme for Indian Carbon Market to be amended soon’ (Down to Earth, 26 October 2023) <https://www.downtoearth.org.in/news/climate-change/carbon-credit-and-trading-scheme-for-indian-carbon-market-to-be-amended-soon-92492#:~:text=CCTS%20was%20notified%20on%20June,of%20NSCICM%20in%20August%202023.> accessed 25 January 2024
