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Contents
Source– The post is based on the article “Green Tax, Black Mark” published in the “The Times of India” on 19th September 2023.
Syllabus: GS3- Environment.
Relevance- Issue related to climate change and green economy
News– Starting October 1, India’s steel and aluminum exports to the European Union will face uncertainty and increased costs due to the Carbon Border Adjustment Mechanism (CBAM) introduced by the EU in April this year.
How will CBAM impact Indian firms?
The EU will roll out CBAM in two stages.
The first phase is the transition period. It commences on October 1, 2023, and runs until December 31, 2025.
During this phase, Indian companies must provide extensive data related to production and emissions for products exported to the EU. The data requirements are exceptionally detailed.
The EU has proposed substantial penalties for non-submission or incomplete data. It will be a challenge for many small and medium-sized firms.
Second stage will start from January 2026, the CBAM tax burden will be implemented. The estimated cost is equivalent to a tariff ranging from 20% to 35%. It will increase the cost of exports.
What are some facts about CBAM?
Initially, CBAM will be applied to specific sectors such as steel, aluminium, fertilisers, electricity, cement, and hydrogen. However, the EU plans to progressively expand the scope of CBAM. By 2034, it will encompass all products from all countries.
CBAM was introduced to address the issue of carbon leakage. It prevents EU companies from relocating to countries with less stringent emission regulations.
The EU’s Emissions Trading System sets emissions reduction targets for most power and industrial installations. Those exceeding the emissions limit are required to purchase emission allowances through auctions. Market determines the price of these allowances.
CBAM aims to compel polluting companies to improve their emissions while deterring relocation by increasing the cost of imports.
CBAM essentially divides the world into two categories: CBAM-charging countries and others. Companies dealing with countries subject to CBAM must adopt cleaner technologies or face significant taxes, while trade with the rest of the world remains unaffected.
This division is expected to disrupt existing global supply chains and lead to increased trade expenses.
The tax imposed by CBAM exceeds the maximum tariff levels that countries are committed to under the World Trade Organization. Consequently, post-CBAM, WTO tariff commitments lose their significance for the EU.
Moreover, FTAs will become one-sided. If India and the EU establish such an agreement, EU goods will enter India without duties, while Indian exports to the EU will still face taxes ranging from 20-35%.
Way forward for India
Develop a calibrated retaliation mechanism (CRM)- For instance, in March 2018, when the US imposed import tariffs on India’s steel and aluminium, India responded by increasing tariffs on 29 specific US products.
This involved precise calculations to ensure that India collected equivalent revenue from US products as the US did from Indian steel and aluminium.
Calibrated Retaliation Mechanism (CRM) offers several advantages, including swift implementation. India can easily adjust product lists and tariff levels to align with the actions of the EU. CRM could be used to counteract the impact of these schemes on Indian exports.
Rename specific existing levies – India could reclassify certain duties as carbon taxes. It will allow companies to offset the tax paid in EU, reducing their overall tax burden.
Other steps- Firms should consider hiring an energy auditor to prepare data in the format prescribed by the EU.
In the long term, larger firms may contemplate establishing two production lines for the same product. One can cater to carbon tax markets like the EU, and the other to serve the rest of the world.
