More Whimper Than CBAM

Context: Border carbon taxes proposed by the EU won’t reduce emissions much and will trigger trade wars.

About Carbon Border Adjustment Mechanism (CBAM)

• A mechanism to impose carbon tariffs on imports. EU proposed CBAM as an approach towards reducing global CO2 emissions.
• Reducing ‘carbon leakage’: T
• The EU Emissions Trading System (ETS) requires heavy greenhouse gas producers to procure permits for every ton of CO2 they emit. 
• Carbon permits are traded, and the benchmark EU ETS permit price has increased by 50% since last year. 
• The system puts European producers at a disadvantage compared to their competitors in other countries that do not have similar CO2 emission norms. 
• CBAM is expected to reduce ‘carbon leakage’ from higher imports from these other countries.

A critical review of CBAM: As highlighted by the UN Conference on Trade and Development (UNCTAD) report

• Miniscule potential: CBAM will lower global CO2 emissions by only 0.1%.
• Negative trade consequences: If the EU implements CBAM with a price of $44 per ton of embedded CO2, it will lower developing countries exports of targeted sectors by 1.4%.
• Many major exporters to EU countries, including China, Russia, Britain etc., have threatened retaliation to similar proposals in the past.
• India’s exports to be affected: As India’s exports of aluminium, steel and iron ore (Carbon intensive) to the EU amounted to $3 billion.
• Implementation challenges: Foreign companies will have to monitor and verify emissions from their products before exporting.
•  If they do not have the means to monitor and verify emissions, or if the EU does not accept their estimates, it would impose its own price.

Conclusion: In the current scenario, it is likely CBAM would be less effective in reducing CO2 emissions and more likely to trigger trade wars.