Carbon Tariffs Needn’t Impede Indian Exports To The EU

Context: Addressing costs of carbon tariffs in future of India-EU trade relations.

EU’s efforts towards reducing carbon intensity

• Adoption of the Kyoto Protocol to the United Nations Framework Convention on Climate Change in 1997: EU agreed to reduce emissions of a basket of six greenhouse gases by 8% from 1990 levels during the commitment period of 2008-2012.
• Pioneer in emissions trading: Introduced the world’s first regional emission trading system, the EU-Emission Trading System (ETS).
  • Implementing ‘cap-and-trade principle: Installations in all energy-intensive sectors like power, steel, cement and ceramics to incur additional costs of pollution allowances or emission reduction.
• The Paris Agreement, 2016: Aspired to reduce greenhouse gas emissions by developing strategies, technologies, capacity, and sources of finance for mitigation and adaptation.
• Carbon Border Adjustment Mechanism (CBAM): Initiative for imposing additional import duties on certain products in accordance with their carbon content to discourage carbon-intensive imports.
  • Aims to address the issue of carbon leakage – a situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints.

Possible implications for India

• May lead to increase in existing tariffs: Payable on Indian exports of certain products to the EU.
  • The CBAM would be applicable on products like paper, wood, ceramics, glass, aluminium, iron, steel and certain chemicals, which are energy-intensive and are regulated under the existing EU-ETS.
  • High tariff elasticity: If the EU increases its tariff from, say, 10% to 10.1%, its imports from India in these sectors will decline by around $1 billion.

Way forward: Prepare to minimize the impact of the EU’s impending decision on carbon-adjusted tariffs.

• Decarbonize the Indian manufacturing sector: Expediting a transition from coal-based to renewable sources of energy while ensuring its efficient usage.
• Expand PAT scheme:
  • In India, energy-intensive sectors have successfully reduced around 92 million tonnes of carbon emissions between 2012-2019 through the Perform, Achieve and Trade (PAT) scheme under the National Mission for Enhanced Energy Efficiency.
  • The success of this scheme calls for deliberations to expand the list of designated consumers so as to incentivize research and investment in energy-efficient technologies and practices.

Conclusion: Each step towards lower carbon emissions will not only help in realizing India’s targets under the Paris Agreement but would also make our goods ‘carbon competitive’, which can be one of the ways to avert additional duties under the CBAM.