The two-day G-20 ministerial meeting on environment and climate change in Italy are expected to raise their concerns over the European Union’s recent proposal on the first of its kind carbon border tax.

Under this proposal, the 27 EU nations will impose a border tax on imports of carbon-intensive goods. Yet to be legally formalized, the tax plan could come into force from 2026.

So, what exactly is a carbon border tax? Why do developed countries want to impose such a tariff and why are developing nations opposed to the idea?

What is Carbon Pricing?

Carbon pricing is an approach to reducing carbon emissions that uses market mechanisms to pass the cost of emitting to emitters.
Its goal is to discourage the use of fossil fuels, address the causes of the climate crisis and meet national and international agreements.
Well-designed carbon pricing can change the behavior of consumers, businesses and investors while encouraging technological innovation and generating revenue that can be used productively.
There are a few carbon pricing instruments, such as a carbon tax and cap-and-trade programmes.

What is Carbon Border Tax?

A carbon border tax (CBT) is a tax on carbon emissions attributed to imported goods that have not been carbon-taxed at source.
The carbon border tax proposal is part of the European Commission’s European Green Deal that endeavours to make Europe the first climate-neutral continent by 2050.

Objective:

To ‘incentivize’ greener manufacturing around the world and create parity with European manufacturers who are already subjected to substantial carbon levies.

A move to benefit local EU manufacturers

The carbon border tax has wide appeal in Europe. It is supported by the new president of the European Commission.

A carbon border tax is able to protect a country’s local manufacturers, motivating them to adhere to green regulations.
Many EU companies are at a cost disadvantage as they have been paying a carbon border tax and for carbon emissions since 2005 under the EU’s Emissions Trading System.
The new carbon border tax can therefore lead to a more level playing field against importers, especially those from nations with more lax environmental standards.

What could the new proposal mean politically?

Notably, China’s continuing reliance on non-renewable energy to power its economy leaves it particularly vulnerable in this matter.
For example, given that China produces steel with blast furnaces that release a large amount of carbon, it will have to pay an additional layer of carbon border tax, which will increase its costs and its market price.
This will consequently reduce the competitiveness of steel produced in China, compared to steel from other countries that is made in more carbon-efficient mills that do not have to pay this additional tax.

This suggests that the carbon border tax is also politically preferable to Europe as it slows down the gradually rising economy in China, and would therefore preserve the European countries’ competitiveness.

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

How does this impact India?

As India’s third largest trading partner, the EU accounted for €62.8 billion ($74.5 billion) worth of trade in goods in 2020, or 11.1% of India’s total global trade.
India’s exports to the EU were worth $41.36 billion in 2020-21, as per data from the commerce ministry.
The CBT would cover energy-intensive sectors such as cement, steel, aluminium, oil refinery, paper, glass, chemicals as well as the power sector.
By increasing the prices of Indian-made goods in the EU, this tax would make Indian goods less attractive for buyers and could shrink demand.
Sadly, India’s many ‘self-reliance’ tariffs are also a contributor to this.

Issues with CBT

Impact on trade: The degree of impact on industrial sectors would be largely influenced by two factors: carbon intensity and trade intensity.
Altering competitiveness: For companies, it will raise the administrative burden of crossing borders and increase trade frictions, especially for small businesses. That will inevitably reduce choice and raise costs for consumers.
Promoting protectionism: The carbon tax may end up being protectionist, and will hit emerging economies like India hard.
Unfair practices under WTO: Depending on their design they could fall foul of WTO measures designed to prevent importing countries from discriminating against particular exporting countries.
A violation of Paris Accord: CBT compels developing countries to pay the same price as the developed countries to climate change. The EU is essentially bypassing the principle of ‘common but differentiated responsibilities’ that should guide international climate action.

Way forward

Carbon taxing is just one way of holding large emitters accountable for their role in harming the environment.
However, fundamental changes can’t be forced by tariffs.
If the planet is to have any hope of meeting the Paris Agreement goals, drastic measures that consider both the economic and social wellbeing of nations’ inhabitants must be taken.
This should take all nations into confidence than imposing such overnight tariffs.
It is no doubt that India must be in the forefront in climate politics. But it must also be cautious about the negotiations in global laws to protect domestic interests.