Context:
The Economic Survey has expressed concerns about the European Union’s forthcoming Carbon Border Tax known as the Carbon Border Adjustment Mechanism (CBAM).
More on the news:
- According to the Global Trade Research Initiative report, India is among the top eight countries that will be negatively impacted by CBAM.
- Along with Europe, both the United Kingdom and the United States are in different stages of imposing their versions of Carbon Border Adjustment Tax in due course
About the European Union CBAM
- According to the European Union, the Carbon Border Adjustment Mechanism (CBAM) is the tool to put a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU and to encourage cleaner industrial production in non-EU countries.
- It proposes tariffs on energy-intensive imports like iron, steel, and aluminum to prevent local manufacturers from facing competitive disadvantages compared to imports from countries with less stringent emission norms.
- The CBAM is set to be implemented on January 1, 2026, while the current transitional phase lasts between 2023 and 2025.
Paris Agreement on Climate Change
- The Paris Agreement is a legally binding international treaty adopted by 196 Parties at the United Nation Climate Change Conference (COP21) in Paris, France in 2015 and entered into force on 4 November 2016.
- The agreement’s overarching goal is to limit global warming to well below 2°C above pre-industrial levels and pursue efforts to limit the increase to 1.5°C above pre-industrial levels.
- To achieve this, countries submit nationally determined contributions (NDCs) outlining their actions to reduce greenhouse gas emissions and build resilience to climate impacts.
Concerns Raised in the Economic Survey
Concerns Over Protectionism
- The Economic Survey 2023-24 argues that the EU carbon tax policy (Carbon Border Adjustment Mechanism) contradicts the principles of the Paris Agreement that recognised ‘Common but Differentiated Responsibilities’.
Impact on Developing Countries
- The Survey highlights that India, along with other developing nations, will face significant challenges due to the protectionist measures of developed countries.
- In 2022, 27% of India’s iron, steel, and aluminum exports, valued at $8.2 billion, were destined for the EU. The CBAM is anticipated to affect India’s exports in these key sectors.
Challenges in Climate Finance
- The Survey points out the challenge of raising funds for climate change adaptation. To achieve its net zero target by 2070, India requires $28 billion annually.
- India’s climate actions have primarily been financed through domestic sources, with international financial support being minimal.
- Domestic sources have been the main contributors to green finance, accounting for 87% and 83% in fiscal years 2019 and 2020, respectively.
Arguments Against Carbon Border Taxes
- The United Nations Conference on Trade and Development (UNCTAD) estimates that a CBAM at $44 per tonne will reduce global carbon emissions by only 0.1% while decreasing global real income by $3.4 billion. Developed countries gain $2.5 billion, developing countries lose $5.9 billion.
- Global value chains have outsourced carbon-emitting activities like manufacturing to the South, while low carbon-emitting activities like branding and financing remain in the North. This links energy efficiency in the North to inefficiency in the South.
- Carbon emissions in traded goods and services make up only 27% of global emissions, indicating that the impact of international trade policy on achieving global green growth is limited.
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