International Trade has a Carbon Problem

Context: 

The European Union’s climate law known as the Carbon Border Adjustment Mechanism (CBAM), has instilled apprehension within the government of India. 

Background: 

• In 2005, the European Union (EU) implemented a significant climate change policy known as the Emissions Trading System (ETS). 
• The ETS operates as a market-based mechanism, aiming to reduce greenhouse gas (GHG) emissions by enabling entities that emit GHGs to trade emission allowances among themselves. 
• This system primarily focuses on regulating emissions from domestic industries within the EU.
• However, the EU has expressed concerns that while it has established a mechanism for its domestic industries to account for emissions, imported products from other countries may not be subject to similar pricing due to either a lack of stringent climate policies or less rigorous policies in those countries. 
• This discrepancy, the EU fears, places its industries at a competitive disadvantage.
• The Carbon Border Adjustment Mechanism (CBAM) has been developed as a solution to this predicament, with the primary aim of leveling the playing field for EU industries. 

About CBAM:

• The CBAM plans to impose a tariff on a set of carbon-intensive imports, which will have to be paid by EU importers and companies who export such goods to EU countries.
• Under the CBAM, imports of certain carbon-intensive products, namely cement, iron and steel, electricity, fertilizers, aluminium, and hydrogen, will have to bear the same economic costs borne by EU producers under the ETS. 
• However, where a carbon price has been explicitly paid for the imported products in their country of origin, a reduction can be claimed.

​​WTO Consistency of the Carbon Border Adjustment Mechanism (CBAM):

• Non-Discrimination Principle and CBAM:
  • Non-discrimination is a fundamental principle of WTO law.
  • Countries must provide equal treatment to similar products regardless of their country of origin (most-favoured nation treatment) and treat foreign-made products the same as domestic ones (national treatment principle).
  • CBAM’s design may appear origin-neutral, but its application may result in discrimination based on inadequate carbon pricing policies or burdensome reporting requirements for importers.

• “Like” Products and CBAM:
  • Determining whether the carbon-intensive products covered by CBAM are “like” each other becomes crucial.
  • Products such as steel may seem similar, but different production processes can result in varying levels of carbon intensity.
  • Traditionally, WTO jurisprudence has not considered processes and production methods relevant for comparing products.
  • Critics argue that CBAM violates WTO law by discriminating between EU and foreign products based on embedded emissions, as processes and production methods are not considered in determining likeness.

India’s Opposition to CBAM:

• India has criticized CBAM as protectionist and discriminatory.
• The impact of CBAM on India is primarily felt in the sectors of aluminium, iron, and steel, which constitute approximately 1.8% of its total exports to the EU.
• There are discussions of challenging CBAM at the World Trade Organization’s (WTO) dispute settlement body.

Balancing Environmental Protection and Trade:

• While the international trade regime allows countries to adopt unilateral measures for environmental safeguarding, it is crucial to ensure that environmental protection does not serve as a pretext for trade protectionism.
• The CBAM needs to be examined in light of this perspective to assess its potential trade-distorting effects.

Conclusion: 

Finally, CBAM is also an important issue in the ongoing India-EU free trade agreement negotiations. India should work with the EU to secure gains on CBAM and ensure smooth onboarding for Indian exporters to maximise the benefits of a bilateral deal, even as the possibility of a WTO challenge remains open.                                                                               

News Source: The Hindu