Carbon Border Adjustment Mechanism

The EU has indicated that it is open to considering India’s proposal for India to domestically collect the carbon tax that the EU plans to levy on Indian exports under the Carbon Border Adjustment Mechanism (CBAM). This issue is important because the EU’s response to India’s proposal is notable given India’s concerns over the impact of CBAM on its exports.

Introduction

• EU has indicated it is open to considering India’s proposal to domestically collect the carbon tax that the EU plans to levy under the Carbon Border Adjustment Mechanism (CBAM)
• This is an important issue given India’s concerns over impact on exports

The CBAM is set to impose additional tariffs on imports of carbon intensive goods like steel, aluminium and cement from 2026. India has proposed that instead of the EU collecting this carbon tax on Indian exports, India could domestically collect the tax.

EU officials have said that while India’s proposal is not rejected, more discussions are needed on the details. The EU’s openness stems from the fact that CBAM is not meant to be a revenue generating mechanism for the EU. By India collecting the tax domestically, it would add to the costs for exporters of carbon intensive goods which is ultimately the EU’s aim with Carbon Border Adjustment Mechanism (CBAM).

This issue is particularly crucial for India given that sectors like steel, aluminum and cement are expected to be the most impacted by CBAM. With estimates of additional levies being as high as 20-35% if compliance is not established, India wants the carbon tax levied to be as low as possible.

What is Carbon Border Adjustment Mechanism?

• what CBAM is and how it will levy additional tariffs on imports of carbon intensive goods like steel, aluminum and cement from 2026
• Aims to prevent carbon leakage and incentivize trading partners to decarbonize

The Carbon Border Adjustment Mechanism (CBAM) is a new policy set to be implemented by the European Union starting in 2026. Under CBAM, additional tariffs will be levied on imports of certain carbon intensive goods like steel, aluminum and cement into the EU. The aim is to impose tariffs ranging from 20% to 35% on these imports based on their carbon emissions during production.

The purpose behind CBAM is twofold. Firstly, it seeks to prevent “carbon leakage”, which occurs when production of carbon intensive goods is simply shifted to countries with less strict emissions regulations than the EU. Secondly, it aims to incentivize trade partners like India to move towards decarbonization of their manufacturing sectors. By making imports more expensive, CBAM encourages countries to adopt greener production technologies aligned with EU standards.

India’s Proposal and EU’s Response

• India’s proposal that it can domestically collect the carbon tax instead of EU collecting it
• EU has indicated it can theoretically be considered but needs more discussion on details
• EU’s openness stems from fact that CBAM is not a revenue generating mechanism

India has proposed an alternative mechanism where instead of the EU collecting the Carbon Border Adjustment Mechanism (CBAM) carbon tax on Indian exports, India could domestically collect the tax. The EU has responded that while it is theoretically open to considering this proposal, more discussions are needed to work out the details.

The EU’s openness to India’s proposal stems from the fact that revenue generation is not the purpose of CBAM for the EU. By India collecting the tax domestically, it would still achieve CBAM’s aim of increasing costs for exporters of carbon intensive goods. This indicates the EU’s priority is adding to producer costs rather than direct tax collection.

However, specifics around how India’s domestic collection would be implemented, the revenue utilization, and mechanisms for oversight and compliance would need to be worked out before the EU agrees. But the EU entertaining India’s proposal indicates a willingness for flexibility on CBAM mechanisms.

Likely Impact on India

• Steel, aluminum and cement sectors likely to be most affected
• Estimates of additional levies up to 20-35% if compliance not established
• Hence India wants carbon tax to be as low as possible

The sectors likely to be the most affected by CBAM in India are steel, aluminum and cement. With the additional tariffs set to be as high as 20-35% if compliance is not established, these industries are facing major cost implications. For example, estimates show Indian steel and aluminum exports could face increased levies of up to 35% under Carbon Border Adjustment Mechanism (CBAM) by 2034.

Given this substantial impact, India wants the carbon tax levied on its exports to be as low as possible. The impact on key sectors also means India has to proactively develop strategies to safeguard its exports and competitiveness.

India’s Strategy

• Aim to have functional Carbon Credit Trading System by 2026, recognized by EU
• Use ‘equivalence’ clause to get taxes like on petroleum and coal recognized
• Insist on following principles like Common but Differentiated Responsibilities

India’s strategy focuses on utilizing certain provisions within CBAM itself to lower the carbon tax burden. One approach is to have a functional Carbon Credit Trading System up and running by 2026 that is recognized by the EU. This would support evidence of compliance and reduce taxes.

Secondly, India plans to leverage the ‘equivalence’ clause under which taxes like those on petroleum and coal can be recognized while calculating overall carbon costs.

India also plans to insist that CBAM follows principles like Common but Differentiated Responsibilities enshrined in climate agreements. This provides some flexibility for developing countries.

Implementation Timelines

• Transitional phase started in Oct 2023 with reporting requirements
• Exporters have time till Jan 2024 to submit quarterly reports
• Concerns around data privacy and protection raised by exporters

The transitional phase of CBAM kicked off from October 2023 with reporting requirements for exporters on product quantities and emissions. Exporters can submit the first mandated quarterly reports by January 2024.

However, Indian exporters have raised concerns around disclosure of sensitive data and lack of clarity on protection of confidential business information provided to comply with CBAM.

Final Thoughts

• Important for India to get best possible terms from EU on carbon tax collection to safeguard exports
• Proactive strategy focusing on developing low carbon technologies, renewable energy needed
• Implications of Carbon Border Adjustment Mechanism (CBAM)

It is crucial for India to negotiate the best possible terms on items like carbon tax calculation, data privacy, equivalence, etc. under CBAM to safeguard the competitiveness of exports to the EU.

India also needs proactive strategies like boosting renewable energy, developing low carbon technologies and energy efficiency. Preparing indigenous sectors to be CBAM compliant will be key.

The implications of CBAM make it an important issue to cover in depth given its far-reaching impact.