EU’s aggressive trade measures
Context:
- Driven by domestic and geo-political factors, the European Union (EU) has amped up a legislative push aimed at reaching its ambitious climate goals.
- However, these pieces of legislation could have consequences for global trade.
What are these laws?
- Among the laws are a carbon tax, a regulation on deforestation and a directive on due diligence for corporate sustainability.
- Climate goals are the big factor fuelling these legislation.
- EU lawmakers, representing a technologically and economically advanced bloc, are addressing climate change with great urgency.
- The laws are in line with the EU’s ambition to be climate-neutral by 2050.
EU’s Carbon border adjustment mechanism:
- Its primary objective is to avert ‘carbon leakage’.
- It refers to a phenomenon where a EU manufacturer moves carbon-intensive production to countries outside the region with less stringent climate policies.
- In other words, replace EU-manufactured products with more carbon-intensive imports.
- From 2026, once the CBAM is fully implemented, importers in the EU would have to buy carbon certificates corresponding to the payable carbon price of the import had the product been produced in the continent, under its carbon pricing rules.
- Conversely, if a non-EU producer is paying a price (or tax) for carbon used to produce the imported goods, back home or in some other country, the corresponding cost would be deducted for the EU importer.
- The Commission, in coordination with relevant authorities of the member states, would be responsible for reviewing and verifying declarations as well as managing the central platform for the sale of CBAM certificates.
- Importers would have to annually declare by May-end the quantity and embedded emissions in the goods imported into the region in the preceding year.
- The idea here is to avert the possibility of carbon leakage alongside encouraging producers in non-EU countries to green their manufacturing processes.
- Moreover, it will ensure a level playing field between imports and EU products.
- This would also form part of the continent’s broader European Green Deal which endeavours to achieve 55% reduction in carbon emissions compared to 1990 levels by 2030 and become a climate neutral continent by 2050.
Are there any other motives for EU?
- The EU faces a key roadblock in implementing strict climate policies—their industries are moving manufacturing bases to developing nations that have lax emission norms.
- This is called carbon leakage. So the EU carbon tax targets industries such as cement, iron and steel, aluminium, fertilizers, electricity and hydrogen, which are more prone to moving away from the EU.
- The bloc now plans to widen the scope of carbon tax going forward.
- It has also introduced legislation that pushes businesses toward renewable means of production to cut its dependence on Russian oil and gas.
What are the concerns voiced by India?
- They complicate trade. India is also concerned about the cost of compliance for small and medium businesses.
- Most Indian exporters to the EU are small businesses, which is why India has sought exemptions for them from the carbon tax.
- India aims to take on the laws at the WTO on the grounds they breach international environmental laws.
Issues with the laws:
- Poor countries argue that the rich world, by pushing stringent trade legislation, are shifting the burden of climate change mitigation on developing countries.
- Carbon leakage and shifting the burden on other developing countries which are not historically responsible for climate change.
Way forward:
- There should be a coalition of developing nations to defend their interest as EU legislation will impact developing nations the most.
- Such pressure worked in the past—after intense international pressure, the EU had to block a law that proposed making all airlines using EU airports to buy carbon allowances.
- India should create a legal framework to enable businesses pay taxes on carbon emission within India rather than to the EU.
Syllabus: Mains; GS III – Issues effecting Indian Economy
SOURCE: MINT
