From UPSC perspective, the following things are important :
Prelims level : Carbon Border Adjustment Mechanism (CBAM)
Mains level : Read the attached story
- The EU and India are working to resolve a trade issue related to the EU’s Carbon Border Adjustment Mechanism (CBAM).
Why such move?
- The EU is India’s second-largest trading partner and export market.
- India has expressed confidence that the intention behind CBAM was not to create a trade barrier but to promote sustainability.
- CBAM has potential impact on India’s Steel and Aluminum sectors.
Carbon Border Adjustment Mechanism (CBAM)
|Proposed by||European Union (EU)|
|Purpose||To reduce carbon emissions from imported goods and prevent competitive disadvantage against countries with weaker environmental regulations|
|Objectives||Reduce carbon emissions from imported goods
Promote a level playing field between the EU and its trading partners
Protect EU companies that have invested in green technologies
How does CBAM work?
|Coverage||Applies to imported goods that are carbon-intensive|
|Integration||Covered by the EU’s Emissions Trading System (ETS), which currently covers industries like power generation, steel, and cement|
|Implementation||CBAM taxes would be imposed on the carbon content of imported goods at the border, and the tax rates would be based on the carbon price in the EU ETS|
|Exemptions||Possible exemptions for countries that have implemented comparable carbon pricing systems|
|Revenue Use||Revenue generated from CBAM taxes could be used to fund the EU’s climate objectives, such as financing climate-friendly investments and supporting developing countries’ climate efforts|
Who will be affected by CBAM?
|Countries||Non-EU countries, including India, that export carbon-intensive goods to the EU|
|Items||Initially covers iron and steel, cement, aluminium, fertilisers, and electric energy production|
|Expansion||The scope of the CBAM may expand to other sectors in the future|
- Encourages non-EU countries to adopt more stringent environmental regulations, reducing global carbon emissions.
- Prevents carbon leakage by discouraging companies from relocating to countries with weaker environmental regulations.
- Generates revenue that could be used to support EU climate policies.
Challenges with CBAM
- Difficulty in accurately measuring the carbon emissions of imported goods, especially for countries without comprehensive carbon accounting systems.
- Potential for trade tensions with the EU’s trading partners, especially if other countries implement retaliatory measures.
Ways to ease impact of CBAM
To minimize the impact of CBAM, India can consider several actions:
- Set up a carbon trading mechanism: To reflect the level of development and adjust the carbon tax paid domestically when paying CBT to the EU.
- Re-designate taxes on essential products: Make these as carbon taxes, which could help lower the net impact of CBT.
- Create a cadre of energy auditors: To ensure fair assessment of carbon emissions for products and help the industry calculate carbon intensity and adopt cleaner technologies.
- Start an industry awareness program: To educate sectors affected by CBT and create a dedicated group involving government, industry associations, and researchers.
- Devise a WTO-compatible retaliation mechanism: To counter CBT, considering that developing countries exporting to developed nations will also suffer from it.
- Sign new Free Trade Agreements (FTAs): After resolving the CBT issue, as high CBT would undermine the benefits of zero import duties.
- Expose the perceived hypocrisy: Utilize global platforms to expose offshoring pollution of developed countries and proposing to tax imports, while not addressing their own consumption patterns.
- The CBAM is a proposed policy by the EU to reduce carbon emissions from imported goods and to promote a level playing field between the EU and its trading partners.
- Although the CBAM has its challenges, it has the potential to incentivize non-EU countries to adopt more stringent environmental regulations and reduce global carbon emissions.
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