Scope of the CBAM
The CBAM aims to level the playing field for EU’s domestic as well as imported products by ensuring that the imported products also incur comparable CO2 costs and prevent domestic businesses from shifting their production plants / operations to non-EU countries12.
The EU’s carbon adjustment mechanism will initially cover in its ambit certain goods whose production is carbon intensive and is at high risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen13. By the end of the transition phase, a review report will be prepared of the CBAM's functioning14. The report will also assess the inclusion of other goods produced in sectors covered by the EU ETS in the scope of the CBAM mechanism, such as certain downstream products15, which will be included by 203016.
CBAM and trade policy issues
The EU has claimed that the CBAM has been designed to be compatible with the World Trade Organization (WTO) and its other international obligations and simply seeks to place EU based producers at par with the non-EU producers in terms of the carbon cost embedded in the covered products. At a preliminary level this seems questionable due to the trade implications of CBAM. Hitherto, border measures allowed under the WTO have been agnostic of the production process or method (PPM) adopted in its manufacture. For example, whether cotton is grown organically or using chemical fertilisers, the customs duty is the same. With CBAM this long held principle is being changed as the same product depending on the production process (i.e., its carbon intensity) will face differential taxation.
Another often repeated complaint about CBAM from the developing countries is that it overlooks the concept of ‘Common but Differentiated Responsibilities’ enshrined as Principle 7 of the Rio Declaration at the first Rio Earth Summit in 1992. The declaration states: “In view of the different contributions to global environmental degradation, States have common but differentiated responsibilities”17. Through CBAM, the EU is arguably equalizing the responsibilities by imposing the same carbon cost wherever the exporter may be located and whatever the carbon reduction commitment of that country may be. Further, the revenues from CBAM will contribute to the EU's budget. Thus, instead of aiding developing countries to meet their carbon reduction objectives, the developing countries exporting to the EU will be contributing to the EU’s ambitious carbon reduction commitments.
Way forward – the road ahead
While international obligations will be debated and settled in appropriate forums, climate policies such as EU’s approach to green energy trade are here to stay. The coming into force of the CBAM is around the corner with its regulatory compliances starting from 1 October 2023. Countries, such as India, need to take stock of their trade strategies and prepare themselves.
India has recently launched its Carbon Credit Trading Scheme (CCTS) in the pursuit of its NetZero goals and of promoting green energy. The CCTS will aid the institutionalization and performance of the Indian Carbon Market (ICM) by laying down a process for compliance in which emission goals will be formulated for specific industries and organisations, upon meeting which they will receive credit certificates. Implementing the CCTS in a robust and effective way will help Indian businesses to demonstrate that their goods are manufactured through low-carbon processes using green technology, thereby, attracting lower CBAM charges and enhancing green energy export opportunities in EU.
Manufacturers in India would need to focus on smart manufacturing by investing in energy-efficient technologies to reduce carbon emissions and adopt sustainable trade practices. Furthermore, while India has been beefing up its green energy initiatives, there is an urgent need for creating complementary green infrastructure that will expedite the transition to clean energy for businesses.
India is at advanced stages of negotiating trade and investment agreements with the EU. This provides India with a platform to put forth its concerns with respect to the CBAM implications. The country must explore negotiating an exemption or a reduced rate of CBAM for the Indian manufacturers. It is well-accepted that the historical burden of global GHG emissions lies with the developed world. In this context, EU’s goals for promoting green energy through trade policy should take into account the concerns of the developing world.
The article is also contributed by Esha Sandhu, Senior Manager, International Trade, EY India