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EU’s Carbon Border Tax

GS Paper 3

Syllabus:  Environment and Conservation

 

Source: DTE

Direction: The article discusses carbon border tax, its stated goal, concerns, possible impacts and way ahead.

 

Context:

  • The European Union (EU) agreed on a preliminary deal for an EU Carbon Border Adjustment Mechanism (CBAM) on imported goods such as iron and steel, cement, aluminium, fertilisers, electricity and hydrogen.
  • The CBAM/ a carbon border tax/ carbon leakage instrument was proposed by the EU in 2021 and will be applicable from October 1, 2023.

 

Background: According to the standard economic theory of trade, imposing carbon taxes on domestic producers without an adjustment mechanism would certainly cause a shift of production to places where those taxes can be avoided.

 

About Carbon Border Tax:

  • A carbon border tax is an import duty based on the amount of carbon emissions produced by the goods in question.
  • It discourages emissions as a carbon price, and it has an impact on production and exports as a trade-related measure.

 

Stated goal of CBAM:

  • To eliminate the difference in carbon price paid by companies subject to the EU’s Emissions Trading System (ETS) and the price paid by companies elsewhere.
  • Levelling the playing field for EU firms.
  • To implement stronger emission reduction efforts.
  • Incentivises non-EU countries to increase their climate ambition.
  • It will ensure that EU and global climate efforts are not undermined due to the relocation of production which is defined as ‘carbon leakage’.

 

Concerns:

  • From an equity perspective, it increases costs in poorer countries, due to the need to remit new taxes, etc.
  • Such schemes are still rare in most of the world and introducing them will be a major policy challenge for lower-income countries.
  • For countries reliant on one of the targeted industries – like Mozambique’s aluminium extraction, this could be a major economic shock.
  • If enacted unilaterally, it is likely to unfairly protect domestic industries from international competition – a practice known as ‘green protectionism.’
  • BASIC countries have emphasised that carbon border taxes could promote market distortion and worsen the trust deficit among countries.

 

The possible impact of the move:

Positive Negative
  • From a longer-term perspective, this may well be beneficial to all if it encourages the more rapid application of renewable technologies.
  • This move by the EU could see other developed economies follow suit.
  • In the short run, this will be harmful to industries in developing countries.

 

Way ahead: Coordinated application of carbon taxes and related climate change avoidance measures would make it unnecessary to apply a border adjustment mechanism.

 

Insta Links:

Who should pay for climate damage?

 

Mains Links:

Q. Should the pursuit of carbon credit and clean development mechanisms set up under UNFCCC be maintained even though there has been a massive slide in the value of carbon credit? Discuss with respect to India’s energy needs for economic growth. (UPSC 2014)