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Carbon Border Adjustment Mechanism

Context:

  • India is concerned about the potential effects of the EU’s Carbon Border Adjustment Mechanism (CBAM) on its carbon-intensive exports to the EU.
  • India’s criticism of CBAM as discriminatory and protectionist has sparked discussions of filing a complaint at the World Trade Organisation (WTO).

Relevance: 

GS Paper 3: Climate change, Sustainable Economy

Mains Question

Examine India’s worries about the CBAM and its potential for discrimination and trade protectionism. How might these issues be resolved within the World Trade Organisation (WTO) framework? (150 Words)


Understanding CBAM:

  • The EU’s 2005-instituted Emissions Trading System (ETS) is a market-based mechanism designed to lower greenhouse gas emissions. CBAM suggests imposing the same prices on imports of carbon-intensive items as are faced by EU manufacturers under the ETS.
  • However, the EU is concerned that imports from nations with less strict environmental regulations may not suffer equal carbon pricing, leaving its sectors at a disadvantage.
  • If carbon pricing has been expressly paid in the nation of origin, there may be decreases in the price that are connected to the emissions taxed under the ETS.

WTO Consistency:

  • The prohibition of discrimination is a cornerstone of WTO law. Although CBAM appears to be origin-neutral, its implementation could unintentionally bias against imports due to insufficient carbon price regimes or onerous reporting requirements.
  • Whether the products covered by CBAM are indeed “like” products is a valid question. For example, steel made in electric arc furnaces uses less carbon than steel made in blast furnaces.
  • If the products are not regarded to be “like,” then typical anti-discrimination laws may only apply in certain circumstances. This reignites the age-old argument about whether procedures and production techniques ought to be taken into account when evaluating products.

Implications for the India-EU FTA:

  • CBAM has grown in importance as a subject of debate in the ongoing India-EU FTA discussions. In order to resolve CBAM issues and secure favourable conditions for Indian exporters, India must work with the EU. India should aim for fruitful communication while the prospect of a WTO challenge is still a possibility in order to maximise the advantages of a bilateral agreement.
  • Impact on India’s Export: Because these will be subject to more scrutiny under the process, it will have a negative effect on India’s exports of metals including iron, steel, and aluminium goods to the EU.

Higher Tariffs and Carbon Intensity:

  • Due to coal’s dominance in global energy consumption, Indian products have a carbon intensity that is much higher than that of the EU and many other nations.
  • Nearly 75% of India’s electricity is generated from coal, which is substantially greater than the EU (15%) and the global average (36%).
  • Because increased emissions would result in higher carbon tariffs to be paid to the EU, direct and indirect emissions from iron, steel, and aluminium are a big worry for India.

Risk to Export Competitiveness:

  • Since India lacks a domestic carbon pricing scheme, this poses a greater risk to export competitiveness as other nations with a carbon pricing system may have to pay less carbo.
  • It will initially affect a few sectors but may spread to other sectors in the future, such as refined petroleum products, organic chemicals, pharma medicaments, and textiles, which are among the top 20 goods imported from India by the EU.

Conclusion:

  • The EU’s introduction of the Carbon Border Adjustment Mechanism (CBAM) brings up challenging concerns at the nexus of global trade and the environment.
  • It’s critical to strike a balance between environmental conservation and inclusive business practises. All parties concerned should prioritise comprehending the consequences of CBAM and working towards solutions that will benefit all parties.

February 2024
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