Navigating Global Trade Amidst Carbon Tax: Implications and Challenges

Carbon tax, as the name suggests, refers to an indirect tax that is levied as a fee on the usage, distribution, or production of fossil fuels and is calculated based on the production of carbon on the usage of the fossil fuel. Also known as “Pollution Tax”, it finds its backing in the polluter pays principle of environmental law and aims to eliminate the usage of fossil fuels in the near future.

In the present economic order, there have been various attempts made by different countries to introduce and levy carbon tax on trade activities across borders which has resulted in an increase in the costs associated with cross-border trade and economic activities. The carbon tax regime is also set to impact Indian markets from October 2023 since Europe has decided to implement the “Carbon Border Adjustment Mechanism”.

Carbon Border Adjustment Mechanism

In recent years, there has been a significant shift in the European Continent’s carbon tax to implement decarbonisation in the wake of the international environmental crisis. As a result of this policy, there has been a paradigm shift in the per capita pollution level in countries like Germany where carbon dioxide emission has come down from 14.3 tonnes in 1979 to 8.1 tonnes in 2021.

The Carbon Border Adjustment Mechanism (CBAM) is a fragment of the “Fit for 55 in 2030 package” which was introduced by the European Union carbon tax with an aim to achieve a reduction of 55% in the emission of greenhouse gases by the year 2030. As a public policy tool, it aims to reduce the emission of carbon by making sure that the goods imported into the country are subject to the same carbon costs as the goods produced within the country in order to bring parity between domestic production and imports. These measures have however increased the cost of exports and imports and therefore increased the global cost of cross-border trade.

In order to implement the Carbon Border Adjustment Mechanism, it has been made mandatory for the importers to declare the quantity of goods that has been imported inside the European Union and the embedded quantum of greenhouse gases produced in the entire year. Moreover, it is also mandatory for the importers to produce a CBAM certificate which is based upon the parameters set by the European Union. This provision has encouraged the non – European Union countries to inculcate a stringent regime of environmental regulations which have helped to reduce not only the carbon levels but also prevented the carbon leakage by acting as a demotivation for companies to migrate into countries with weak environmental regulations.

Impact Of CBIM On Indian Trade

The Indian trade with European Union revolves majorly around Iron, Steel, and Aluminium, which will face an adverse impact due to the present carbon tax mechanism. The carbon levies ranging from 19.8 – 52.7% would lead to a significant threat to the economic advantage that Indian trade possessed due to its low-cost of exports.

The cost of exports of Indian products is also significantly higher than that of other countries because coal dominates the major production process including the energy consumption in the manufacturing process. The Indian coal-powered fire accounts for 75% while the global average stands at 36% and the European Union accounts for 15%. Due to the above reasons, the CBAM would pose a huge risk to the Indian market share and would result in an increased cost due to carbon tariffs.

Impact On Export Competitiveness

The export competitiveness of India and many other countries in the business of cross-border trade would be disrupted in the short run due to an increased cost of the carbon tax. However, it is expected that the trade in various sectors such as pharmaceuticals, textiles, organic products, and refined petroleum products is set to grow in the upcoming years which are among the top commodities exported by India.

As there is no scheme equivalent to carbon taxation present in India, it would pose a greater risk to the Indian market since the market share of India would be absorbed by those nations which have a framework of carbon pricing systems or are eligible for exemptions.

India must undertake several measures to mitigate the adverse effects of CBAM, including:

• Introduction of schemes like Production Linked Incentive and national policies for steel and aluminium that promote production while adhering to predefined carbon emission levels and standards.
• Stringent implementation of decarbonization principles to reduce the production sector’s dependence on coal and other carbon-intensive fuels. This would lead to lower carbon ratings and subsequently result in reduced taxation.
• Indian manufacturers must also set negotiations with the EU in order to consider various factors and reduce the carbon taxation regime. Moreover, various incentives for “green” production units should also be provided.

Conclusion

The implementation of carbon taxes in import and export trade has had detrimental effects on Indian exports to the European Union, resulting in increased import costs for the EU and export costs for India. This situation has raised concerns about potential economic setbacks for the country.

However, it also serves as a valuable lesson for the Indian production sector. It highlights the importance of embracing green energy as the future of the world. To thrive and sustain in an economically uncertain world and protect the nation’s interests, the production sector must continually adapt and introduce suitable modifications and changes.

By prioritizing cleaner energies, India can proactively prepare its economic market for potential future setbacks that may arise from the implementation of carbon taxes by other nations. This forward-thinking approach will contribute to the country’s resilience and competitiveness on a global scale.

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