An Understanding of Carbon Border Tax with Specific Reference to EU
Steel is an incredibly valuable material that is utilised in a wide range of sectors, from the construction of structures to pharmaceutical equipment and automobiles. But producing steel requires a lot of energy. It produces a significant amount of carbon dioxide (Co2) and accounts for 8% of the world’s greenhouse gas emissions. The environment won’t benefit from it.
And nations are conscious of this. In light of this, they might decide to charge a special tax to everyone who produces this “dirty” steel. The carbon tax is the name of it. And the objective is straightforward: if you punish “dirty” production methods, firms will innovate and discover more environmentally friendly ways to make steel. Emissions should be decreased as a result. All of this is done to slow the increase in global temperature.
This could lead to something called ‘carbon leakage’
You see, a nation’s industrial progress is hampered when it levies a carbon tax on home industries like steel. simply because the carbon tax causes the expenses of the steel industry to increase while the profits deteriorate. Because the customer, let’s say a vehicle manufacturer, isn’t actively seeking out “green steel,” it can’t pass the costs through to the customer. They know that consumers won’t pay more for a car constructed of green steel as they compete in a very cutthroat market. Therefore, the automaker just purchases “cheaper” steel from a nation where there are no additional costs (without a carbon tax for instance).
The steel producer loses its advantage over rivals. It costs more than its rivals in the international market. And before you realise it, operations may even need to be stopped. And it’s bad for the nation, especially considering that it took place during the heroic effort to tackle climate change.
There is also another, more extreme variation of this.
If you make steel and you fear the carbon tax would affect you, you might decide it would be better to establish a steel production facility abroad. one that does not levy these taxes. After that, you can export the products back to your starting point. It is an easy workaround. But it might keep your company alive. However, it doesn’t make a difference in the number of carbon emissions. It’s simply moved to a different place. Not only has the nation lost its steel producer, but it has also done little to slow down climate change. It is disappointing.
Current Scenario in European Union
The locals have been closely monitoring this situation. The EU is still concerned that their carbon tax could harm their local sector, despite some studies, including some from the World Bank, demonstrating that carbon leakage isn’t very common. Consequently, they now want to connect trade policy and climate policy. impose what is likely the first “transitional carbon price” in history. or the CBAM, which stands for “carbon border adjustment mechanism”.
How would this change things in the EU?
A corporation in the EU will need to purchase a carbon certificate before importing products that are a part of the cement, iron and steel, aluminium, fertiliser, and energy industries. They will lose money as a result of this. What sum of money? Well, roughly the same amount that they would have been required to pay as a carbon tax if they had been manufacturing the steel within the EU. It’s an import duty or equalisation tax meant to level the playing field.
Additionally, this might erase the steel price differential between the EU and other nations. The EU importer may request a refund if it can demonstrate that the original manufacturer has previously paid some form of a carbon tax.
The home industry in the EU is safeguarded in this manner. Additionally, EU businesses won’t even consider establishing production facilities elsewhere to avoid paying carbon taxes.
Anyhow, everything is still in the beginning phases. They intend to do a trial run between 2023 and 2025. Additionally, they will collect all the data about carbon during this time. The actual tax will start once the year 2026 arrives.
In Conclusion: India’s response to the EU’s decision
India, which was quite dissatisfied with this choice, even brought it up at the just-completed COP27 UN Climate Change Conference.
India exports goods associated with CBAM to the EU for more than €5 billion. Indian goods become more expensive if importers from the EU are now required to pay taxes on these goods. They could also decide to stop doing business with India. India’s exports would undoubtedly suffer as a result.
India’s concern is that developed nations have not accepted enough responsibility for their role in climate change, have not made enough contributions to funds to assist vulnerable countries, and now a carbon border tax is just another protectionist measure to protect domestic industries at the expense of hurting developing economies even more.
