Explained: Why India is protesting EU's 'discriminatory' carbon border tax

Last week, Indian environment minister Prakash Javadekar opposed the European Union's (EU) plan to levy an additional 'carbon border tax' on imports from countries such as India that do not have strict norms for controlling industrial greenhouse gas (GHG) emissions.

Earlier, on March 10, 2021, the EU Parliament had adopted a resolution to implement a 'Carbon Border Adjusted Mechanism' (CBAM), a June 2021 draft regulation pertaining to which proposed that goods entering the EU would be taxed at the borders. Such a tax would promote "low-carbon, resource-efficient manufacturing", the resolution says. The UK and the US are also considering such proposals.

The BASIC (Brazil, South Africa, India and China) countries' grouping had opposed the EU's proposal in a joint-statement in April, terming it "discriminatory" and against the principles of equity and 'common but differentiated responsibilities and respective capabilities' (CBDR-RC). These principles acknowledge that richer countries have a responsibility of providing financial and technological assistance to developing and vulnerable countries to fight climate change.

Why does the EU want a carbon tax?

For two reasons: its environmental goals and its industries' global competitiveness, experts tell us.

Recently, the EU declared it would cut its carbon emissions by at least 55% by 2030 compared to 1990 levels. EU's greenhouse gas emissions have fallen by 24% compared to 1990 levels.

But imports from emissions--which contribute 20% of the EU's carbon dioxide emissions--are increasing, the resolution said. Such a carbon tax would incentivise other countries to reduce GHG emissions and further shrink the EU's carbon footprint.

Second, the 27 EU member states have much stricter laws to control GHG emissions. It has an 'Emissions Trading System' that caps how much GHG individual industrial units can emit; those that fail to cap their emissions can buy 'allowances' from those who have made deeper cuts.

This makes operating within the EU expensive for certain businesses, which, the EU authorities fear, 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.

How does this impact India?

As India's third largest trading partner, the EU accounted for €62.8 billion ($74.5 billion) worth of trade in goods in 2020, or 11.1% of India's total global trade. India's exports to the EU were worth $41.36 billion in 2020-21, as per data from the commerce ministry.

The EU's March resolution stated that to begin with, by 2023, the CBAM would cover energy-intensive sectors such as cement, steel, aluminium, oil refinery, paper, glass, chemicals as well as the power sector.

By increasing the prices of Indian-made goods in the EU, this tax would make Indian goods less attractive for buyers and could shrink demand. The tax "would create serious near-term challenges for companies with a large greenhouse gas footprint--and a new source of disruption to a global trading system already roiled by tariff wars, renegotiated treaties, and rising protectionism", the consultancy BCG said in an analysis on June 30, 2020.

BCG estimated, for example, that a levy of $30 per metric ton of CO2 emissions could reduce the profit pool for foreign producers by about 20% if the price for crude oil remained at $30-40 per barrel.

Could it work?

Such a mechanism to charge imported goods at borders may spur adoption of cleaner technologies. But if it happens without adequate assistance for newer technologies and finance, it would amount to levying taxes on developing countries, said Sanjay Vashist, the Delhi-based director of Climate Action Network in South Asia, a coalition of 200 civil society organisations.

"It is currently unclear how the EU would assess emissions of an imported product. Would it be from the entire value chain, upstream and downstream?" asks Nitya Nanda, director of the Council for Social Development, a Delhi-based research and advocacy firm. "There are many small businesses that will face difficulty in quantifying their emissions and additional costs will be passed on to the consumers, eventually. There are many such practical impediments."

In the draft proposal, the EU has acknowledged several challenges in assessing emissions along global value chains and the possibility of tax being passed on to consumers. It suggests a fixed duty or tax on imports.

The design of such a levy matters, Nanda emphasised. If it discourages sectors and industries that are already adopting cleaner technologies, and becomes another procedural and compliance hassle, it could prove counterproductive.

Instead, climate action advocates say, richer countries must make good on their promises of technological and financial assistance to enable developing countries to make the transition to low-carbon pathways for growth. There is disagreement on whether developed countries have kept their climate finance commitments with conflicting claims from countries, according to this 2021 editorial published in the journal Nature.

The Organisation for Economic Development, whose members are mostly developed countries, claims that developed countries had mobilised $78.9 billion of the targeted $100 billion in 2018 but a report by the development organisation Oxfam said that this amount was not more than $22.5 billion, according to the editorial. Research commissioned by the UN Secretary-General Antonio Guterres found that there was over-reporting of climate-funding by $3-$4 billion, indicating the scale of opacity in reporting this data, the editorial added.