Carbon Border Tax

What is Carbon Border Tax? What are the causes behind imposing Carbon Tax? How does this impact India? What are the Issues of Carbon Border Tax? To learn more about it, read on.

A group of nations, including India, recently voiced their opposition to the European Union’s (EU) proposal for carbon border taxes at the 27th Conference of Parties (COP) in Sharm El Sheikh, Egypt.

A consortium of countries, including India, declared that carbon border fees must be avoided since they could lead to market distortion and exacerbate the lack of trust between parties.

What is Carbon Border Tax?

• An import duty based on the quantity of carbon emissions produced during the production of the product is known as a Carbon Border Tax. As a carbon tax, it reduces emissions. It has an impact on exports and production as a trade-related measure.
• The plan is a component of the European Green Deal, which aims to make Europe the first continent to be climate neutral by 2050.
• There is some debate as to whether a carbon border tax is better than a national carbon tax. (A national carbon tax is a fee that a government imposes on any company within the country that burns fossil fuels.)

What are the causes behind imposing Carbon Tax?

EU and Climate Change Mitigation:

• By 2030, the EU promises to reduce its carbon emissions by at least 55% from 1990 levels. These levels have decreased by 24% thus far.
• Import-related emissions, which account for 20% of the EU’s CO2 emissions, are rising, nonetheless.
• A carbon tax of this kind would encourage other nations to cut their GHG emissions, which would further diminish the EU’s carbon footprint.

Carbon Leakage:

• Certain firms find it expensive to operate in the area due to the EU’s Emissions Trading System.
• The EU authorities worry that these companies would choose to move to nations with less or no emission restrictions.
• This is referred to as “carbon leakage,” and it raises global emissions as a whole.

What is Carbon Pricing?

• In order to pass on the cost of emissions to the emitters, carbon pricing employs market mechanisms to reduce carbon emissions.
• The use of fossil fuels is to be discouraged, the causes of the climate issue are to be addressed, and national and international commitments are to be met.
• Effective carbon pricing can influence the actions of consumers, companies, and investors while promoting technological advancement and bringing in money that can be put to good use.
• There are a number of methods for pricing carbon, including carbon taxes and cap-and-trade schemes.

How does this impact India?

• In 2020, the EU, India’s third-largest trading partner, accounted for $74.5 billion in goods trade, or 11.1% of India’s total international commerce. The value of India’s exports to the EU in 2020–21 was $41.36 billion, according to figures from the commerce ministry.
• This tax would raise the cost of products created in India in the EU, decreasing the appeal of those products to consumers and possibly decreasing demand.
• Companies with a high carbon footprint would face significant short-term hurdles as a result of the tax, which would also be a fresh source of upheaval for a world trading system already beset by trade disputes, renegotiations, and rising protectionism.
• If the price of crude oil stayed between $30 and $40 per barrel, a tax of $30 per metric tonne of CO2 emissions might cut the profit pool for international producers by around 20%.
• The CBT would include both the electricity sector and energy-intensive industries like cement, steel, aluminium, oil refineries, paper, glass, and chemicals.
• Sadly, this is also a result of India’s several “self-reliance” tariffs.

What are the Issues of Carbon Border tax?

Response of the BASIC Countries:

•  The BASIC (Brazil, South Africa, India and China) countries’ grouping had opposed the EU’s proposal in a joint statement 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.

Non-Consensual with Rio Declaration:

• The Rio Declaration’s Article 12—which states that standards applicable to developed countries cannot be applied to developing countries—contradicts the EU’s idea that there should be a single global standard for the environment.

Change in the Climate-Change Regime:

• The greenhouse gas inventories of the importing countries would also need to be modified to account for the greenhouse content of these imports, which effectively means that GHG inventories would need to be calculated at the point of consumption rather than on the basis of production.
• Companies with greater greenhouse gas footprints would face significant short-term hurdles as a result of the tax.
• The entire climate change regime would be upset by this.

Protectionist Policy:

• The policy can also be regarded as a disguised form of protectionism.
• There is the risk that it becomes a protectionist device, unduly shielding local industries from foreign competition in so-called ‘green protectionism.

Way Forward

• India is not the goal of this EU policy; rather, it is Russia, China, and Turkey, which are important producers of steel and aluminium as well as large carbon emitters.
• There isn’t much of a rationale for India to lead the opposition. Instead, it ought to have a bilateral discussion and resolve the matter with the EU.
• Adoption of greener technologies may be encouraged by a system like a carbon border tax for taxing imported goods at borders.
• But if it does so without sufficient funding and support for newer technologies, it would be detrimental to the developing world.
• One method of making major emitters answerable for their part in environmental harm is through the imposition of carbon taxes.
• Tariffs, however, cannot be used to compel fundamental changes.
• If the planet is to have any chance of achieving the goals set forth in the Paris Agreement, drastic actions that take into account the economic and social wellbeing of people living in different countries must be taken.
• This should instil trust among all nations rather than introducing such sudden tariffs.