Equity and emissions: Decoding the EU carbon tax for global climate justice

The world is staring at the imminent dangers of climate change with its impacts becoming more pronounced and widespread with each passing year. The potential harm to global economic growth and development has prompted urgent action from world economies calling for concerted climate interventions. Key climate interventions include reducing carbon footprints, embracing renewable energy, enhancing energy efficiency, conserving natural ecosystems, and adopting climate-resilient practices for a sustainable future. Global communities are also recognising the need for climate change legislations consisting of the laws and policies that govern action on climate change by setting its legal basis. 

The Inflation Reduction Act by the United States is one of the most significant pieces of climate legislations in the history. It will deploy nearly $400 billion over the coming decade to slash carbon emissions. Another such bold, and somewhat unprecedented, climate-change intervention recently introduced is the EU’s carbon tax. In line with the increasing global persuasion to reduce carbon emissions, especially that from economic activities, the European Union (EU) recently introduced the Carbon Border Adjustment Mechanism (CBAM), the world’s first carbon tax, to address what they are referring as ‘carbon leakage’. CBAM or, in general parlance, carbon tax is a taxation tool introduced to deter imports from countries where climate policies are not on par with that of the EU. 

Initially, the levy will apply to imports of certain goods from hard-to-abate industries whose production is carbon-intensive such as cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. Once it is fully phased in, CBAM will capture more than 50 per cent of the emissions in emissions trading system (ETS)-covered sectors. 

CBAM bodes ill for Indian exports 

However, CBAM raises concerns for developing countries like India, heavily reliant on carbon-intensive industries for economic growth. The potential 20-35 per cent tax on imports from 2026 threatens Indian exports, risking substantial revenue losses. While India is planning to adopt a voluntary carbon trading scheme in 2023 and is building the way for a new approach by amending the Energy Conservation Act, 2001, there is a lack of clarity on the precise mechanism at this stage. India’s lack of a domestic carbon pricing system compounds the challenges, impacting its export competitiveness. 

CBAM is estimated to induce losses of over $8 billion to Indian exports from 2026. Iron, steel, and aluminium industries are likely to be some of the most impacted sectors. For instance, Indian aluminium exports to the EU, which constitute 29 per cent of merchandise exports, face trouble due to CBAM as aluminium production is an extremely energy-intensive process and requires the use of coal, resulting in higher greenhouse gas emissions. EU is an attractive market for Indian aluminium exports. In FY 2023, primary aluminium accounted for 29 per cent of the total $74.8 billion worth of merchandise exports to the EU.  

Towards carbon-responsible practices  

The effort of the developed economies to design carbon accounting standards provides India with an opportunity to understand its own requirements and work towards setting up a framework that better suits its needs of energy security and Net Zero commitments. India is already taking giant strides to support and prioritise decarbonisation in various sectors – be it energy, steel, or transportation. In the energy industry, which accounts for almost half of the country’s total GHG emissions, India has been actively making efforts towards decarbonisation with reformative initiatives like the smart metering programme.  

India needs to pace up the regulatory architecture to fuel carbon-responsible economic activities and align its economic growth with the UN’s SDG goals. A strong and favourable regulatory framework is necessary to support the uptake of carbon-efficient economic initiatives to enable commercial growth while contributing to global efforts towards reducing carbon footprint. Without outrightly rejecting and countering CBAM, India should adopt a diplomatic and proactive approach when dealing with global trade challenges like CBAM. It should advocate for fair trade practices and engage constructively with international initiatives while also pursuing environmentally conscious policies to strengthen its global position. This would certainly enhance India’s global standing as a country which is committed to a sustainable future and climate goals.  

Enforce climate justice 

Any deliberation over carbon legislations or climate policies is incomplete if we do not factor in the need to enforce climate justice to ensure that the costs of mitigating climate change are equitably distributed and do not burden the poor or developing economies. A CBAM-like carbon tax mechanism with its trade distortion potential is a double whammy for less advanced economies who may have contributed the least to global carbon emissions but are at most risk of climate change impacts. For example, India’s per capita annual emissions were about a third of the global average in the period between 1850 and 2019. In fact, entire South Asia contributed just about 4 per cent of historical cumulative net anthropogenic emissions during that period. In contrast, North America and Europe have contributed almost 10 times more to global cumulative emissions.  

As the EU takes the lead in combating climate change, the trading bloc must be reminded of its $100-billion annual commitment set under the Paris Agreement to aid the developing nations minimise their carbon emissions. The Global North should be morally obligated to ensure a level-playing field in the fight against climate change and provide the developing nations with climate finance, technology and knowledge transfer and support for capacity building to ensure that climate action is fair and all-inclusive. Balancing the EU's carbon tax requires a nuanced approach that accommodates both carbon reduction goals and climate justice. Collaborative efforts between developed and developing economies can pave the way for a fair and sustainable global response to climate change and avoid a new era of vicious protectionism and trade wars.  

Views are personal. The author is MD & CEO, IntelliSmart 

(DISCLAIMER: Any views, thoughts, and opinions expressed by the author or authors are solely their own and do not reflect the views, opinions, policies, or position of Business Today)