Editorial. EU’s carbon border tax is hypocritical, unjust 

The European Union’s carbon border tax, the paperwork for which begins in October even as it comes into force within three years, is condemnable on many counts. The ultimate plan is to impose a heavy tax on all imports into the EU (by 2034) for the carbon dioxide emitted in their production, so that they are supposedly on the same footing as EU-produced goods which pay a similar tax for emissions.

This notion of parity is meaningless; as pointed out recently by Finance Minister Nirmala Sitharaman, it violates climate justice. The developed countries have polluted over centuries; they colonised the resources of the developing world to arrive at their current levels of income and technology. This should be reparation time in terms of climate finance and technology transfer. On both counts, the OECD countries have failed to live up to their promises. What’s worse, now the other side is being asked to pay up.

Under the ‘carbon border adjustment mechanism’, exporters of steel, aluminium, fertilizer, cement, hydrogen and electricity from the rest of the world to the EU will have to pay a tax on the tonnes of carbon dioxide emitted in their manufacture – with effect from January 2026. The rate will be based on the prevailing levy in the EU for the carbon dioxide emitted in excess of the permissible amount. The EU has been lowering this cap for its producers, to meet emission reduction goals. With the cap being lowered, the demand for emission trading scrips, which have to be bought if the cap is breached, has been on the rise. The price of these scrips has risen from €30 a tonne in December 2020 to about €100 a tonne now. For countries that levy no explicit ‘carbon tax’ such as India, the EU rate will be applied on the ‘imported’ emissions; else, it shall be the difference between the two countries’ levies. From October 1, the EU will collect data from exporting countries on their processes. What reveals the EU’s double standards is that fossil fuels per se, on which the EU is import-dependent, are so far exempt from this levy.

According to the Global Trade Research Initiative, the tax will translate into a 20-35 per cent tariff on India’s exports of steel, aluminium and cement, which now attract an MFN duty of less than 3 per cent. As much as 27 per cent of India’s exports of steel, iron and aluminium products, or $8.2 billion, are headed towards EU. India must contest this levy, making common cause with BRICS partners. It should flag this issue in its FTA talks with the EU. The funds from this levy should accrue to exporting countries. But tactics aside, energy auditors must be roped in by industry bodies to create capacity. Domestic levies on fuel and coal can be rejigged as a carbon tax. The UNCTAD has said in the context of energy transition that a review of IPRs on key technologies is called for. But first and foremost, industry should be aware of the implications of this move.

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