European carbon tax could torpedo FTA talks: Experts

Indian experts said the proposed tax is discriminatory and could violate  rules set by the World Trade Organization  (Photo: Reuters)
Indian experts said the proposed tax is discriminatory and could violate rules set by the World Trade Organization (Photo: Reuters)

Summary

The carbon tax, beginning 1 Oct, could attract a 20-35% duty on key Indian shipments

New Delhi: India should take up the European Union’s proposed carbon tax with the bloc as it could attract a 20-35% duty on key Indian shipments, potentially clouding free trade talks between the two sides, trade experts said.

The EU’s Carbon Border Adjustment Mechanism (CBAM)—a tax on the bloc’s imports of iron and steel, cement, fertilisers, aluminium and electricity—comes into force on 1 October.

The measure is aimed at protecting domestic businesses from being undercut by cheap imports of polluting goods from countries whose carbon regulations are not as strict as those of the 27-nation bloc.

But Indian experts said the proposed tax is discriminatory and could violate rules set by the World Trade Organization. In addition, it means tariff cuts being negotiated under the India-EU FTA are now up in the air.

The EU is India’s third largest trading partner and accounts for over 10% of total Indian trade in 2022. The two sides concluded the fourth round of FTA negotiations on 17 March.

Prof Sunitha Raju of the Indian Institute of Foreign Trade said the border tax on ‘embedded’ carbon dioxide emissions has provisions that are discriminatory as per WTO rules and India should focus on those provisions.

“EU companies are given carbon credits or allowances beyond which they have to pay for the emissions through carbon credits purchased from trading. This provision is not available for exporting countries and therefore translates to subsidy to local firms," Raju said.

Even if countries have a carbon pricing mechanism, the tax imposes the differential price between the EU emissions trading system (ETS) and other countries.This, she said, means “not recognizing other countries‘ pricing mechanisms or protecting European firms through CBAM."

The measure is also aimed at plugging ‘carbon leakage’, which takes place when EU firms circumvent stringent regulation and source goods from less-regulated countries.

“If all countries agree to have strict regulation then this problem will not arise. Any effort to discriminate can then be effectively addressed. Recent UNCTAD study shows that if all countries implement regulations then the 2030 climate commitments can be realized," she added.

The bottom line, other experts said, is the EU and US remain among the biggest carbon emitters, and have historical responsibility for causing the climate crisis. Developing countries need to press rich nations to honour their commitment to transfer $100 billion to help poorer countries fight climate change, they added.

Engineering Export Promotion Council of India (EEPC) India chairman Arun Kumar Garodia said, “The steel industry is looking at greener alternatives. There are huge investments involved and the government is also assisting the industry to help reduce carbon footprint. But we know European countries aim to tax carbon emission. But currently when they have a huge crisis back home they move to burning coal," Garodia added.

There are fears the carbon tax could torpedo the FTA talks. “Even if both countries agree to zero tariffs under FTA, CBAM will ensure while EU goods enter India at zero tariffs, Indian goods will pay very high CBAM tariffs," a Global Trade Research Initiative report said. India’s chief negotiator for UK and EU FTAs Nidhi Mani Tripathi, Joint Secretary in the Department of Commerce at an industry event said that India feels “(a) little challenged with the announcement of CBAM recently" which covers 5-6 sectors that are key to Indian industry and supply chains.

“A number of studies are conducted when you start a FTA negotiation... but all your assessment go haywire when you keep getting such new regulations with such new difficult measures. I have been saying all along that the approach that the EU has followed in all its previous FTAs may not exactly be the same with India and India comes with an unique opportunity," Tripathi added as per a PTI report.

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