Is the EU’s carbon tax a green good or just protectionism in disguise?

What is the tax about?

The EU Carbon Border Adjustment Mechanism (CBAM) imposes a tariff on goods from countries that are not part of the Emission Trading System (ETS), which allows companies to trade carbon credits or allowances. But most developing countries aren’t part of this regional arrangement. This opens the scope for ‘carbon leakage’ where companies shift production outside EU to countries without ETS. Benefiting from perceived lenient climate standards, this shift leads to circumvention of emission standards. CBAM seeks to plug carbon leakages by taxing imports from countries without ETS.

Which are the sectors affected by it?

To begin with, iron and steel, aluminium, cement, fertilizer, hydrogen and electrical energy. Between October 2023 and December 2025, exporters to the EU will have to provide information on the carbon footprint of their products. Based on that, the tax will be charged from 1 January 2026. Companies that fail to provide the information will be charged using default CO2 emission values on the products. The fear is that soon, most other products would also be covered under the tax and that other nations like the UK, Japan, Canada and the US may levy a similar tax on their imports.

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What is the impact likely to be?

It will significantly increase the cost of importing from non-ETS countries, potentially making them unviable. On cement, the tax could be as high as 90%. More than a quarter of India’s iron, steel, and aluminium exports, worth $8.2 bn, went to the EU in 2022. If the EU adds more products, billions could be in lost additional costs.

Is it protectionism in a green garb?

The main charge by India and some other developing countries is this is nothing but a trade barrier that is discriminatory and against the principles of equity under the Paris Agreement on climate change. At the heart of the issue is the debate on whether developing economies should be penalized for emissions when they are not historically responsible for climate crisis. The EU contends higher cost of compliance makes their industries unviable and carbon tax is one way of levelling the field, but some see a ploy in this.

How is India reacting to it?

India is set to lead a pushback against the tax at the WTO. Already, the BASIC nations—Brazil, South Africa, India and China—have condemned the tax. Additionally, India is weighing retaliatory tariffs on imports from the EU. It will also likely impact talks on a free trade agreement, with India hardening its stance. As in the case of agricultural subsidies at WTO, CBAM could set off a flurry of disputes in the next few years—and even deepen the divide between developed and developing nations.