The EU’s Carbon Border Adjustment Mechanism calls for a well-hedged response

The EU’s Emissions Trading System (ETS), its cap-and-trade mechanism, has revealed flaws that cast doubts on its efficacy.
The EU’s Emissions Trading System (ETS), its cap-and-trade mechanism, has revealed flaws that cast doubts on its efficacy.


Indian exports will be burdened by the EU’s carbon levy, but it does have a clear principle backing it that requires us to be realistic and hedge our trade bets by decarbonizing output

Mahatma Gandhi’s observation that the world has enough for everyone’s needs but not greed is oft-cited in the context of our climate crisis. But no less relevant is his advice that we must not judge others by their worst actions and ourselves by our best principles. Evenness matters. With the EU’s Carbon Border Adjustment Mechanism (CBAM) in effect from 1 October, India’s exports of carbon-laden products to Europe—mainly aluminium and iron-and-steel—have been burdened with green reporting rules whose red-tape of data-fields to be filled is so thick, it looks like a trade barrier in itself. Annual shipments of over $8 billion are exposed to this strap-down already, but a harsher blow might be dealt three years hence, should the CBAM’s carbon levy kick in. This action by the EU looks likely to hurt our economic interests, which explains why the government might protest it as an unfair tariff at the World Trade Organization (WTO), the revival of whose dispute-settling body the G20 recently agreed upon. But, while anything that distorts trade flows must duly be put to scrutiny, we must take Gandhi’s cue and also weigh the principles cited by the EU. It will give us a realistic view of future trade dynamics and help exporters hedge their risk of green barriers.

To the extent that today’s climate imperative justifies market intervention, we can expect pro-planet riders to increasingly be placed on free trade under the same argument. What New Delhi sees as a distortive burden on EU imports from countries that did not pollute the world’s air, the EU projects as a field-leveller to prevent ‘carbon leakage.’ An early mover on capping industrial exhaust, the EU argues that the point of its carbon compression would be lost if cheaper carbon-laden imports took the place of its internal production. If its producers must bear the cost of going carbon neutral by 2050, so should imports. Else, demand would be met by dirty industries outside the EU, achieving little. The emissions of imports will have to be paid for, it insists, for parity with EU-based industries buying carbon credits to offset their pollution. As carbon pricing is a useful device against climate change, the CBAM does have a clear principle behind it. How it will work out in practice, though, is another matter. The EU’s Emissions Trading System (ETS), its cap-and-trade mechanism, has revealed flaws that cast doubts on its efficacy. Scandals have arisen over fudged offsets, suggesting that the ETS can be gamed. Moreover, a CBAM levy can be questioned if sought to be imposed post-2026 at the ETS rate. At around €85 per tonne of carbon, this figure reflects only the EU’s state of demand and supply. China’s price is roughly a tenth of that and India’s net-zero goal of 2070 and low cost base overall both suggest it would be even cheaper here. So what the EU claims as an equalizer could also act as an import barricade in the shape of punitively high tariffs.

To be sure, a WTO wrangle over CBAM could give New Delhi a bargaining chip for its ongoing trade talks with the EU. Even so, it would be best to bet on a global policy path that balances trade with the planet’s interests. While the West’s lopsided emissions, for which pledged transfers have been slow, remain a sore point, the pragmatic way ahead for Indian exporters would be to double down on what they must do anyway, decarbonize their output, even as we pry open a principle-driven debate on the impact of carbon prices on world trade.

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