Hindu Editorial Analysis : 3-October-2023

The European Union’s proposed Carbon Border Adjustment Mechanism (CBAM) aims to levy taxes on carbon-intensive products, affecting imports like cement and steel from countries with high carbon footprints, including India. This policy, set to be implemented from 2026, raises concerns about its impact on India’s economy.

Understanding Carbon Border Adjustment Tax
  • Discouraging Emissions and Ensuring Fair Competition
    • CBAM discourages emissions by imposing a carbon tax on imports.
    • It aims to prevent production relocation to countries with lax climate policies, aligning with global climate goals.
    • CBAM equalizes carbon prices between domestic and imported products, ensuring fair competition.
  • Implementation Details and Scope
    • EU importers must purchase carbon certificates equivalent to the EU’s carbon pricing.
    • Initially applied to products like cement, steel, and electricity, the list will expand to cover all goods by 2034.
Challenges and Criticisms
  • Need for Clarity and Questions on Levy
    • The effectiveness of CBAM is questionable due to uncertainties in carbon pricing.
    • CBAM levy might be disproportionately high for countries like India, impacting imports negatively.
  • Market Distortions and Trust Deficit
    • Carbon tariffs could distort markets and create trust issues among nations.
    • The BASIC group at COP27 opposed carbon border taxes, citing potential market distortion and trust deficit.
Challenges for India
  • Trade Barriers and Uncompetitive Exports
    • Green reporting rules burden Indian exports to Europe, acting as a trade barrier.
    • Indian products’ higher carbon intensity results in proportionally higher carbon tariffs, making exports uncompetitive.
  • Global Impact on Trade and Balance of Payments
    • International climate policies, including CBAM, may influence other countries to adopt similar regulations, impacting India’s trading relationships and balance of payments significantly.
Suggestions for Mitigation
  • Minimizing Impact on Firms
    • Indian exporters should incorporate CBAM costs into their pricing strategies to minimize financial impact.
  • Focus on Greener Production
    • Exploring greener production methods can reduce carbon emissions, thereby lowering the carbon tax burden.
  • Sharing Emission Data
    • Indian exporters need to share detailed emission data with EU importers, enabling precise calculation of carbon tariffs.
  • Transition to Renewable Energy
    • Shifting to renewable energy sources like wind, solar, and green hydrogen can reduce carbon emissions during production, mitigating the impact of CBAM.
Why In News

The European Union’s Carbon Border Adjustment Mechanism is likely to hurt India’s economic interests, imposing challenges on Indian businesses and affecting the country’s export-oriented industries. As India navigates this scenario, finding sustainable solutions and enhancing environmental practices could pave the way for a more mutually beneficial global trade landscape.

MCQs about Impact of EU’s Carbon Border Tax on India

  1. What is the primary purpose of the European Union’s Carbon Border Adjustment Mechanism (CBAM)?
    A. To increase imports from non-EU countries
    B. To discourage emissions from carbon-intensive products
    C. To promote unfair competition among EU businesses
    D. To reduce exports to developing nations
    Correct Answer: B. To discourage emissions from carbon-intensive products
    Explanation: CBAM aims to discourage emissions by imposing a carbon tax on imports of carbon-intensive products, aligning with global climate goals and promoting environmentally responsible trade practices.
  2. Which products will the Carbon Border Adjustment Mechanism (CBAM) initially apply to?
    A. Electronics and textiles
    B. Cement, iron and steel, aluminium, fertilizers, and electricity
    C. Food and beverages
    D. Pharmaceuticals
    Correct Answer: B. Cement, iron and steel, aluminium, fertilizers, and electricity
    Explanation: Initially, CBAM will apply to imports of cement, iron and steel, aluminium, fertilizers, and electricity, gradually expanding to cover all products by 2034.
  3. Why might the Carbon Border Adjustment Mechanism (CBAM) pose challenges for India’s exports?
    A. It imposes restrictions only on EU imports
    B. It raises the prices of all imported goods
    C. Indian products have a higher carbon intensity than European counterparts
    D. It encourages competition by lowering tariffs
    Correct Answer: C. Indian products have a higher carbon intensity than European counterparts
    Explanation: Indian products having higher carbon intensity means that carbon tariffs imposed by CBAM will be proportionally higher, making Indian exports substantially uncompetitive.
  4. What should Indian exporters focus on to minimize the impact of CBAM?
    A. Increase production without considering carbon emissions
    B. Ignore the policy and continue exporting as usual
    C. Incorporate CBAM costs into their pricing strategies
    D. Reduce quality to lower production costs
    Correct Answer: C. Incorporate CBAM costs into their pricing strategies
    Explanation: Indian exporters should factor in CBAM costs into their pricing strategies to minimize the financial impact, allowing them to adapt to the new policy effectively.

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