Exporting into a world with carbon tax

Source– The post is based on the article “Exporting into a world with carbon tax” published in the “Business Standard” on 1st May 2023.

Syllabus: GS2- Environment – Climate Change

Relevance– Issues related to climate change and carbon emissions

News– There is concern in India as the tangible implementation of the European “Carbon Border Adjustment Mechanism” (CBAM) kicks in on October 1 this year.

What is the logic behind “Carbon Border Adjustment Mechanism” by Europe?

In Europe, dramatic moves have been made by governments for decarbonization. In Germany, per capita, annual carbon dioxide emission has come down from the peak of 14.3 tonnes in 1979 to 8.1 tonnes in 2021.

Decarbonisation in the European Union (EU) produces a global public good. It comes at the expense of European industry. EU voters are conscious that they are paying more for goods in return for reduced emissions.

If carbon intensive production merely shifted out of the EU, the global public good of decarbonisation would not be delivered. Jobs in Europe would be lost. This has led to the idea of the “carbon border tax”:

Imports into the EU should be taxed at the border. It will reflect the market price of carbon within the EU, and achieve neutrality in the decision of a firm to locate in the EU or outside it.

How India should respond to European “Carbon Border Adjustment Mechanism”?

The two industries that matter today for Indian exporters are steel and aluminium. Firms that take steel and aluminium into the EU are required to establish measurement systems about carbon intensity, and deliver statements on it.

Some in India argue for the use of India’s diplomatic influence to get the EU to roll back its CBAM. This is likely to be an inferior strategy. The EU is only the first to introduce a carbon tax. Many other countries will surely follow.

Policymakers need to recognise this emerging landscape and better embed the Indian economy within it.

The CBAM describes the information systems required to track upstream emission. India needs to work on building these information systems.

What are steps taken in India for decarbonisation?

Policymakers and firms in India have known about these moves from the proposal stage in 2021.

The Ministry of Steel has run a “Green Steel” initiative. Electricity policy has given flexibility to buyers for exclusive renewable electricity-purchase mechanisms.

Indian firms in numerous industries have moved towards sourcing renewable electricity. These steps have helped prepare the ground for this day.

The electricity policy has created freedom for buyers to get renewable electricity at will. The Union government’s Interstate Transmission System (ISTS) helps greatly. The system removes the barriers faced by private buyers and renewable-energy generators.

What is the way forward for green energy in India?

Electricity is a state subject, and local conditions diverge across the country. Subsidies for farmers are an issue in Haryana but not in Delhi. The technical possibilities vary by locale: Hydel in the Himalayas, solar in Rajasthan.

Carbon taxation in the world is one more important factor that varies in various states. For Gujarat, Maharashtra, Karnataka, and Tamil Nadu, exporting is important. These states require a greater focus on carbon border taxes.

These states need to become pioneers in India’s electricity sector for full support to the requirements for renewable electricity of their export sector at efficient prices.

What are different strategies for decarbonisation in India?

A path based on central planning. Officials design the electricity system, and also establish technical rules such as the minimum efficiency of air conditioners.

There is another path based on carbon taxation. The carbon tax harnesses private self-interest, and is the path to lowest-cost decarbonisation in India.