The EU’s CBAM has lent urgency to fair carbon prices

Source: The post is based on the article “The EU’s CBAM has lent urgency to fair carbon prices” published in “Live mint” on 12th October 2023.

Syllabus: GS3- Ecology and environment- Pollution (carbon trading)

News: The article discusses the European Union’s Carbon Border Adjustment Mechanism (CBAM), which affects imports by considering their carbon emissions and pricing. This mechanism may disadvantage developing countries like India, due to differing carbon pricing and emissions standards, potentially conflicting with the Paris Agreement’s principles.

What is the EU’s Carbon Border Adjustment Mechanism (CBAM)?

Introduction Date: The CBAM was introduced by the European Union on October 1, 2023.

Covered Goods: It focuses on specific goods like iron, steel, aluminium, cement, fertilizer, and electricity.

Reporting Requirements: Importers must report:

Direct and indirect carbon emissions of these goods.

Production methods.

Carbon price paid in the country of origin.

Penalties: If emissions aren’t reported, penalties range from €10-50 for each tonne of unreported embedded emissions.

BAM Certificates: Starting January 1, 2026, importers will need to buy BAM certificates. These account for the price differences in emissions between the EU and the exporting country.

Purpose: The CBAM aims to balance the carbon emissions pricing between the EU and imported goods, potentially impacting the competitiveness of developing countries’ exports.

What are the impacts of CBAM on developing countries?

Competitiveness Concerns: The World Bank and UNCTAD highlight potential reductions in the competitiveness of exports from developing countries to the EU, especially for India.

Reporting and Financial Strain: These countries need to report detailed carbon emissions data and face financial penalties for non-compliance, which may strain resources.

Emission Price Differences: CBAM accounts for the differences in emissions prices between the EU and exporting countries. For example, even if Indian aluminum or steel products have similar emissions to those produced in the EU, exporters must pay the price differential, which can disadvantage them.

Inconsistent with Paris Agreement: Developing countries argue that CBAM challenges the principles of the Paris Agreement by demanding equivalent carbon emissions pricing, despite agreed differential emission reduction obligations, known as Nationally Determined Contributions (NDCs).

Climate Transition Costs: The mechanism might inadvertently cause exporters from developing countries to financially contribute to the EU’s climate transition, opposing the principles of common but differentiated responsibilities in global climate agreements.

What are the concerns regarding carbon emission pricing?

Demand for Equivalence: The EU’s CBAM seeks equivalent pricing of emissions, which raises concerns due to varying carbon pricing among different countries.

Contradiction with Paris Agreement: Countries have agreed to diverse emission reduction obligations, known as Nationally Determined Contributions (NDCs) under the Paris Agreement, whereas CBAM enforces a common pricing structure, possibly violating this principle.

No Global Standard: There are over 70 carbon pricing initiatives globally, but no universally agreed principles for measuring and accounting for the price of emissions.

Unfulfilled Commitments: Developed countries promised $100 billion annually in climate finance for developing nations by 2020 under the Paris Agreement, a commitment that remains unfulfilled.

Differential Obligations Ignored: CBAM potentially disregards the principle that countries with historically high emissions have higher obligations than developing countries, as established in the UN Framework Convention on Climate Change.

What are the existing emission charges and regulations?

India’s Emission Charges and Regulations:

Renewable Purchase Obligations (RPO): India has regulatory mechanisms like RPO under the Electricity Act, which mandates certain entities to source a portion of their electricity from renewable sources.

Specific Energy Consumption (SEC): Under the Energy Conservation Act, SEC norms help regulate the energy use in industries.

Coal Cess: India imposes a coal cess of ₹400 per tonne on domestic and imported coal as an emission charge.

Carbon Credit Trading Scheme (CCTS): The government is planning a CCTS, which should enhance the adoption of market-based pricing for emissions in India.

At a Global Level:

Various Carbon Pricing Initiatives: Globally, there are over 70 carbon pricing initiatives, as per the World Bank, reflecting a wide array of approaches to managing and pricing emissions.

WTO’s Sliding Scale Proposal: WTO Director General Ngozi Okonjo-Iweala proposed a scheme that categorizes countries into four, based on their development status and historical emissions, influencing the carbon price they would pay.

Paris Agreement Commitments: Under the Paris Agreement, countries have submitted Nationally Determined Contributions, reflecting their self-set commitments and approaches towards reducing emissions, which implicitly involves varied pricing and managing mechanisms for carbon emissions.