Note4Students
From UPSC perspective, the following things are important :
Prelims level: Carbon Border Adjustment Mechanism (CBAM)
Mains level: Read the attached story
Central Idea
- Commerce and Industry Minister has strongly criticized the European Union’s (EU) proposed Carbon Tax on imports, deeming it “ill-conceived” and warning of potential consequences for the EU’s manufacturing sector.
- He asserted that even if the plan, set to take effect in 2026, proceeds, India will counter it by imposing its own carbon tax.
What is the 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?
| Details | |
| 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 |
Advantages offered
- 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.
Consequences for EU Manufacturing
- Auto Sector Impact: The minister suggested that the European auto sector could be one of the first casualties, particularly affecting steel and aluminum usage.
- Opportunity for India: Goyal saw this as an opportunity for India to develop a robust auto sector, leveraging cost advantages in the global market.
India’s Response and Carbon Tax Strategy
- Counteractive Measures: India intends to neutralize the impact of the EU’s carbon tax by imposing its own.
- Investing in Green Energy: Revenue from the Indian carbon tax would be channelled into the country’s green energy transition, which, indirectly, could help exporters transition to cleaner energy and reduce their carbon footprint.
- Negotiations with EU: The government is engaged in dialogues with EU counterparts regarding the levy’s fairness and pricing disparities.
Conclusion
- The EU’s proposed Carbon Tax and India’s counterstrategy highlight the complexities of international trade, environmental concerns, and the potential consequences for various industries.
- India’s strong stance underscores its commitment to safeguarding its economic interests while engaging in constructive negotiations with the EU to ensure a fair and mutually beneficial outcome.
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