BW Explains: What Is EU’s New Mechanism To Reduce Carbon Emission?
Climate change and environmental deterioration are constantly emerging as major issues around the globe, which led the world powers to constitute together and agree on Paris Agreement.
The treaty adopted by 196 countries in COP21 aims to limit global warming by 1.5 degrees Celsius. In order to achieve the goal decided in COP21, countries, regional cooperation bodies and world organisations are tirelessly working to mend the health of the earth.
According to one NOAA Climate.gov provides authentic and scientific data related to climate and science, Earth’s temperature has risen by an average of 0.14° Fahrenheit (0.08° Celsius) per decade since 1880, or about 2° F in total.
The rising temperature of the earth will destroy vegetation and degrade the life system of human beings. The emission of carbon and other green gases is considered the major cause behind the increasing temperature and global warming.
Hence, in order to push down the temperature of the earth, countries are trying to work on all the reasons behind the increasing temperature. In the same regard, European Union proposed to bring in a new mechanism to reduce carbon emissions across the globe.
What Is CBAM?
The new mechanism proposed by European Union is known as Carbon Border Adjustment Mechanism (CBAM) which imposes a tax on imported goods which are being produced from non-green processes. CBAM was brought in to reduce the usage of carbon goods that is not sustainable for the environment.
The policy is an attempt of the EU to cut down carbon emissions by 55 per cent by 2030. This vision of the European Union is one of the parts of ‘Fit for 55 in 2030 package’. The CBAM is also in line with the Green Deal of the European Union and has envisioned making the continent ahead in achieving the goal of the Paris Agreement.
CBAM will start to function by levying a 20-35 per cent tax on select imports into the EU from 1st January 2026. The tax will initially be levied on the goods like steel products, iron ore, aluminium products, cement and fertilisers.
How CBAM Functions?
CBAM is also referred to as the carbon border tax, that will ensure the countries using the process to produce the imported goods to the EU will be environmentally hygienic. According to the policy, the importing countries will have to buy carbon certificates from the carbon credit market.
Under CBAM, importer countries will require to declare the number of goods imported into the EU and their embedded Greenhouse Gas (GHG) emissions on an annual basis.
The amount of tariff is adjustable as per its adverse effect on the environment, such as for iron ore it is higher while for fertilisers it is lower. Behind proposing CBAM as policy, the EU wants non-European countries to focus on their production technology which would not harm the environment. As per the proposed policy circular, the EU will utilise the carbon border tax in order to strengthen its green policies.
How Will The CBAM Impact India?
European countries are the major trading partner in India and account for nearly Euro 120 billion worth of trade in goods in 2022 or 10.8 per cent of total Indian trade. While India is the EUs 10 biggest trading companion and accounts for 2 per cent of the total trade in goods of the EU.
The CBAM policy will obstruct the free trade flow between India-EU, the goods India export to the EU steel, iron and aluminium products will be highly scrutinised after the proposed law.
As the products will get through more checkups and get under the tariffs, the demand for the products in the European market will be affected. According to the policy, Indian goods will be carbon levies ranging from 19.8 per cent to 52.7 per cent.
In order to deal with such international trade restrictions, India should make itself prepared for such future regulations. India needs to formulate decarbonisation in the production processes so that India will be able to practice free-flow trade.