Ecostani | Why EU’s carbon tax puts a spanner in climate change mitigation
The mechanism will revive emissions certificates, placing a burden on developing nations – India’s position is clear, it plans to oppose it
India is likely to take the European Union (EU) to the World Trade Organisation over its proposed “restrictive” carbon tax on imports for six emission-intensive sectors on grounds that it is an “ill-conceived” idea, and has threatened to impose its own carbon tax on imports from the EU.
In October 2023, the EU proposed a Carbon Border Adjustment Mechanism (CBAM), under which the union would apply carbon tax for emissions at the production stage for six sectors such as iron, steel and cement. Under the mechanism, which would be operational from 2026, importers of goods to Europe would have to register with the EU and buy CBAM certificates equivalent to emissions during production from the Emission Trading System (ETS) accredited to the EU.
Since the fall of the Clean Development Mechanism (CDM), a first-of-its-kind emission trading version under the Kyoto Protocol, the price of emission certificates has plummeted to less than US $80 in the European ETS. However, the price of a tonne of emission saved in the EU carbon exchange is still the highest in the world compared to similar markets in the United States and China, where it is as low as US$10.
The CABM regime proposed by the EU can revive the emission certificates and is legitimised under the 2015 Paris Agreement, which sets emission mitigation targets for close to 200 countries under the ambit of the United Nations Framework Convention on Climate Change (UNFCCC). Many renewable companies in Europe hold emission certificates in large numbers and experts say revival of the market would benefit them.
India and some other developing countries have described the CABM regime as “unfair” and found it to be restrictive trade practices under the garb of climate change mitigation, though the EU claims that the mechanism is WTO compliant. A group of countries led by India had opposed the carbon border tax at the recent COP27 meeting arguing that it could result in “market distortion” with undue advantage to the European companies, whose production lines are fuelled more with renewable energy as compared to the developing world.
The BASIC group comprising Brazil, South Africa, India, and China said in a joint statement dated November 15: “Unilateral measures and discriminatory practices, such as carbon border taxes, that could result in market distortion and aggravate the trust deficit amongst Parties, must be avoided. BASIC countries call for a united solidarity response by developing countries to any unfair shifting of responsibilities from developed to developing countries.”
At the recent Gujarat Vibrant Summit, India’s commerce and industry minister Piyush Goyal said if the “restrictive” carbon mechanism is not abandoned by the EU, India may propose its own carbon tax on goods coming from Europe.
“Europe needs to understand that such a mechanism can kill its own export-oriented manufacturing industry. We are speaking to our counterparts in the EU in this and I am hopeful that the issue will be resolved,” he said.
In November 2023, the minister had not ruled out the possibility of India moving the WTO against CABM, together with other developing countries including China. “We are for a fair, level-playing field for exporters and will oppose unfair taxes and levies that can harm Indian industry,” he said, in a statement.
Emission trading isn’t tax
Experts, however, point out that the EU’s carbon tax is different from the ETS proposed under the Paris Agreement. “The Paris Agreement provides for an emission trading mechanism between the companies and not a tax in the name of ETS by a country,” said Chandra Bhushan, who heads Delhi-based climate change advocacy group, International Forum for Environment, Sustainability and Technology (iFOREST).
India is also coming up with its domestic ETS at GIFT City in Ahmedabad for which a pilot has already been conducted in Surat. Over 100 Surat-based companies have signed up. In 2024, the Gujarat government plans to expand the ETS to major carbon emitters sectors in the state.
The ETS allows carbon-emitting entities to buy emission certificates from those who have introduced measures to offset their high emissions and provides incentives to reduce emissions. A study by the Gujarat government said that the pilot resulted in a 24% reduction in emissions for companies that registered.
The EU’s CABM will initially apply to imports of cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. All importers will have till December to register on the CABM website and report greenhouse gas emissions (GHG) embedded in their imports. Starting January 2026, the EU proposes to not allow imports till emission certificates are bought to offset GHG emissions for the preceding year, the CABM website states.
Experts say that the EU mechanism restricts a business from operating unless it is CABM compliant. This means that companies not meeting the EU’s emission standards would have to buy high-cost emission certificates from the European carbon exchange and will not have the freedom to offset emissions from any other exchange.
“The mechanism appears arbitrary. The EU cannot apply its standards across the world. There has to be a global agreement on emission standards for different high-emitting sectors. Also, the CABM does not provide incentives to reduce emissions,” Bhushan said.
This is not the first time that the EU has proposed a carbon tax. In 2014-15, the EU had proposed a carbon tax on bunker fuel such as aviation and shipping claiming that such a tax would reduce global dependence on fossil fuels. However, the plan took a backseat because of opposition from countries including the United States, China and India.
Chetan Chauhan is a national editor with the Hindustan Times with close to three decades of journalistic experience. In Ecostani, a weekly column, he will cover the intersection environment, politics and the economy.
