Preparing industry for Carbon Border Tax

In Context

• The EU, the UK, Canada, Japan, the US and others are bracing up to levy CBT on imports.

About Carbon Border Adjustment Tax

• About:
  • The European Union has proposed a policy called the Carbon Border Adjustment Mechanism (CBAM) to tax products such as cement and steel that are extremely carbon intensive, with effect from 2026.
  • It is a duty on imports based on the amount of carbon emissions resulting from the production of the product in question. 
• Significance:
  • Discouraging emissions:
    • As a price on carbon, it discourages emissions. As a trade-related measure, it affects production and exports.
    • The EU claims to be concerned with the relocation of production to countries with less ambitious climate policies, undermining EU’s and global climate objectives.
  • The CBAM also has an economic driver. 
    • By ‘equalizing’ the price of carbon between domestic products and imports, the EU claims to promote fair competition, levelling the playing field between EU and non-EU businesses.
• How would the CBAM work?
  • If implemented as planned, EU importers will have to buy carbon certificates corresponding to the carbon price that would have been paid in the EU, if the goods had been produced locally.
  • The price of the certificates would be calculated according to the auction prices in the EU carbon credit market. 
    • The amount of certificates required would be defined yearly by the quantity of goods and the embedded emissions in those goods imported into the EU.
  • The CBAM would initially apply to imports of cement, iron and steel, aluminium, fertilizers and electricity.
  • The UK proposes levying CBT on cement, chemicals, glass, iron and steel, non-ferrous metals, non-metallic minerals, paper and pulp, fertiliser, and power generation. 
    • The list will gradually expand to cover all products by 2034. 

Opponents

• BASIC Group:
  • BASIC, a group constituting Brazil, India, South Africa and China, and therefore large economies that are significantly dependent on coal, has for several years voiced common concerns and reiterated their right to use fossil fuel in the interim during their countries’ eventual transformation to clean energy sources.
  • At COP27 BASIC group opposed the ‘carbon border tax’.
    • They have jointly stated that carbon border taxes, that could result in market distortion and aggravate the trust deficit amongst parties, must be avoided.
• According to few other experts, Carbon Tax is unjust. 
  • CBT may not help in reducing pollution as there is no focus on lowering wasteful consumption.

Preparing industry for Carbon Border Tax

• Minimising Impact:
  • CBT will affect lakhs of small and big firms. Indian exporters must factor in CBT into their costing and prepare to minimise its impact.
• Focusing on greener production options:
  • The rate of CBT depends on how much carbon has been emitted during production to make the export product. 
  • So, there is a need to explore greener production options for production of the concerned commodities. For Example, 
    • Steel:
      • Steel made from a blast furnace route emits more carbon dioxide and may attract higher tax than steel made through an electric arc furnace, or steel made using green hydrogen.
        • Blast furnaces and basic oxygen furnaces emit about 2.2 tonnes of CO2 per tonne of steel produced. 
        • But electric arc furnaces emit 1.2 tonnes of CO2 for the same quantity of steel produced. 
      • So, a firm using an electric arc furnace to make steel will have lower CBT liability than those using the blast furnace route.
    • Chemicals: 
      • A sure way towards less carbon emission goal is using electricity from wind or solar sources, not coal or natural gas. 
      • But as fossil fuel is the raw material and not just an energy input for over 30,000 regularly used products, complete decarbonisation looks difficult.
• Sharing emission data:
  • Indian exporters of steel, aluminium, cement, fertiliser, hydrogen, and electricity will need to share precise emission data with the counterpart EU importers, who will share the data with the CBT authorities.
  • The producers’ data would include installation-wise production details like the quantity of products, verified emissions reports, and data regarding the embedded emissions of each type of goods. 
  • Scientifically capturing this data will need the help of energy auditors.
• Using power generated from renewable energy:
  • This will immediately lower the carbon load — fossil fuels like coal, oil, or natural gas cause 75 per cent of global carbon dioxide emissions. Wind, solar and green hydrogen are current options. 
  • However, switching to new technology is expensive and may only be feasible in some cases.

Way ahead

• Alignment of key parameters:
  • A global view on this topic should include an alignment of key parameters applicable to them, as well as agreed standards for measuring carbon that is emitted in the production of goods. 
• Transparency and non-discrimination:
  • Transparency and non-discrimination should remain key principles of any global understanding, and that should also ensure that carbon-related measures do not unnecessarily restrict trade. 
• Adhering to Paris Agreement:
  • A shared vision should also recognize, in line with the Paris Agreement, that countries observe different approaches and speeds in their decarbonization efforts.
• With the proposed CBAM, there is a new sense of urgency for a shared understanding on carbon-based trade policies.
  •  If countries believe a carbon border tax is a way forward.