Relevance: GS-3: Conservation, Environmental Pollution, and Degradation, Environmental Impact Assessment.

Key Phrases: carbon neutrality, European Union Green Deal, European Union, Net-Zero emission, greenhouse gas (GHGs) emissions, Fit-for-55’ package, EU Emission Trading Scheme (EUETS), Carbon Intensive and Trade Exposed, Carbon Border Adjustment Mechanism (CBAM).

Context:

• The European Union wants to be the first carbon-neutral region in the world by 2050.
• It brought out the ‘European Union Green Deal’ in July last year to focus on a new growth strategy that aims to transform the EU society into a fair and wealthy one with a modern, resource-efficient, and competitive economy.

CBAM : carbon-pricing system

• To attain carbon neutrality, the EU has set forth immediate targets and has brought out the ‘Fit-for-55’ package, a communication of its 2030 climate targets.
• A provision in the policy plan is the introduction of the Carbon Border Adjustment Mechanism (CBAM), a carbon-pricing system proposed for imports into the EU.
• The CBAM suggests taxing the imported goods-based difference between carbon used in the production of domestic and imported goods.
• Proposed to be complementary to the EU Emission Trading Scheme (EUETS), during the transition phase of CBAM — beginning January 1, 2023 — importers will only have to report emissions embedded in the production of goods and are not obliged to pay a financial penalty.
• The CBAM will come completely into force from January 1, 2026, and the measure will see a gradual reduction of free EUETS allowance coverage of 10 percentage points per year and a complete phase-out by 2035.
• In the initial phase, five CITE (Carbon Intensive and Trade Exposed) sectors such as iron and steel, aluminium, cement, fertilizers, and electricity will be taxed under CBAM. Eventually, all sectors under EUETS will be brought under its ambit.

Concerns over CABM:

• Legality of CABM and Protectionism:
  • The EU claims that CBAM is intended to reduce carbon leakage, create a level playfield for EU producers and encourage producers in other countries to adopt cleaner technologies.
  • Developing countries have raised their concern about the legality of CBAM pointing out its conflict with the World Trade Organization (WTO) and the United Nations Framework Convention on Climate Change (UNFCCC) norms, and are afraid that it encourages protectionism.
  • History provides several instances of conflict between domestic restrictive policies stating environmental concern and trade openness such as the Shrimp-Turtle Case and Air Transport Association of America vs Energy Secretary Case for Energy and Climate Change.
  • Rulings in these cases have been in favour of environmental laws, proving that the ongoing debate is a continuation of pre-existing issues and, in the past, environmental concerns have outweighed those related to trade.
• Revenue utilization mechanism:
  • Developing countries also flag the use of revenue collected from CBAM.
  • According to the EU, revenue collected from CBAM will be a part of the EU’s budget, the Next Generation EU, a recent initiative launched to provide economic support to EU member countries impacted by the COVID-19 pandemic.
  • Countries opposing the proposed revenue utilization mechanism suggest that if CBAM is to be implemented, revenue collected from it should be used for cleaner technology adoption in developing countries.

India-EU relationship:

• India and the EU share a healthy trade relationship. The EU is India’s third-largest trading partner, while India is the EU’s 11th largest trading partner.
• In 2019-20, India-EU trade accounted for ₹63.8 billion (11.1% of total Indian trade) in goods, while a total of 1.9% of EU’s total trade in goods in 2020 came to India. India exports almost 14% of its global exports to the EU.
• Recently, there has been increasing initiative from both sides to deepen engagement with each other.
• Talks on India-EU Free Trade Agreement (FTA) that were stalled a while ago have picked up again.
• The target to finalize the Free Trade Agreement has been set for 2023-24.

CBAM’s Impact on India:

• Many of the CBAM goods, including unwrought aluminium, aluminium powder, iron, and steel in their primary forms are strategically important for India.
• According to the CBAM impact assessment conducted by the Commission, India was the eighth largest exporter of iron and steel and the twelfth largest exporter of aluminium to the European Union in 2019.
• The imposition of the CBAM will thus affect a significant share of India's exports to the European Union, and Indian goods will run the risk of becoming less competitive in the EU market due to the financial and administrative burden imposed by the CBAM.
• The UNCTAD forecasts that India will lose USD 1-1.7 billion in exports of energy-intensive products such as steel and aluminium.
• India has consistently opposed the CBAM, questioning its compatibility with the fundamental rules of the World Trade Organization (WTO).
• According to India, the CBAM is discriminatory and goes against the principles of equity and common but differentiated responsibilities.

Way Forward:

• Both India and the EU are committed to climate change, and the recent progress in the India-EU alliance opens prospects of a customized partnership and mutual growth.
• Rather than a tax on exports to the EU as proposed in CBAM, India and the EU can cooperate better by investing in cleaner and greener technologies in India and helping in cleaning up production in India.
• Such a partnership will ensure that both India and the EU have their agendas of economic growth and sustainability fulfilled, a win-win situation for both entities.

Source: The Hindu

Mains Question:

Q. How can India and the European Union better cooperate to realize the target of net-zero emission despite the concerns over the ‘Carbon Border Adjustment Mechanism (CBAM)’?