Global warming and climate change are major global challenges that affects all governments and corporates. These are global problems and it needs global solutions. The EU has set ambitious climate goals, including reducing greenhouse gas emissions by 55% by 2030 and reaching net-zero emissions by 2050. The carbon tax is a key part of the EU’s strategy to achieve these goals.
The European Union (EU) has introduced a carbon border adjustment mechanism (CBAM). Effective October 1, 2023, the CBAM will have an initial implementation targeting imports of specific products and precursor materials that have a high carbon footprint and are particularly susceptible to carbon leakage. These include cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen. During this period, importers of goods in the scope of the new rules will only have to report greenhouse gas emissions embedded in their imports, without making any financial payments or adjustments. There is a transitional period of 27 months which will end on 1st January 2026, from when the taxes will have to be paid.
The gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS). ETS is a “cap and trade” scheme where a limit is placed on the right to emit specified pollutants over an area and companies can trade emission rights within that area. Under ETS, companies that emit greenhouse gases are required to hold a number of allowances equal to the amount of greenhouse gases they emit. If a company emits more greenhouse gases than it holds allowances for, it must buy additional allowances. If a company emits fewer greenhouse gases than it holds allowances for, it can sell its excess allowances.
The CBAM is likely to have a significant impact on global trade. One of the goals of the CBAM is to level the playing field between EU producers and producers in other countries that do not have to pay for the carbon emissions associated with their production. It is expected to raise the cost of goods imported into the EU, which could make them less competitive with goods produced in the EU. This could lead to job losses in some sectors of the economy, particularly in countries that are heavily reliant on exports to the EU.
The CBAM is also likely to lead to a shift in trade patterns. Companies that are subject to the CBAM may move their production to countries that are not subject to the tax. This could lead to a loss of jobs in the EU and a gain of jobs in other countries.
The CBAM is a debatable policy. Some argue that it is necessary to address climate change, while others argue that it is a protectionist measure that will harm the global economy. It remains to be seen how the CBAM will be implemented and what its ultimate impact will be.
Here are some of the potential impacts of the EU carbon tax on global trade:
Increased prices for imported goods: The EU carbon tax is likely to increase the cost of imported goods, as importers will need to pay the tax on the carbon emissions associated with those goods. This could make imported goods less competitive with domestically produced goods and could lead to a decline in imports.
For example, a study by the International Monetary Fund (IMF) found that the CBAM could increase the price of imported steel by up to 20%. This could make EU steel more expensive than steel from other countries and could lead to a decline in the demand for EU steel.
Shifts in production: The EU carbon tax could lead to shifts in production, as companies seek to avoid the tax by moving their production to countries that do not have a carbon tax. This could lead to job losses in the EU and job gains in other countries.
For example, a study by the European Commission found that the CBAM could lead to the loss of up to 100,000 jobs in the EU steel industry. This is because companies in the EU steel industry would be at a competitive disadvantage compared to companies in countries that do not have a carbon tax.
Increased protectionism: The EU carbon tax could lead to increased protectionism, as countries seek to protect their domestic industries from the effects of the tax. This could lead to trade wars and a decline in global trade.
In addition to the potential impacts mentioned above, the EU carbon tax could also have a number of other impacts on global trade. For example, the tax could lead to increased innovation in low-carbon technologies, as companies seek to avoid the tax by developing more efficient ways of producing goods. The tax could also lead to increased investment in renewable energy, as countries seek to reduce their reliance on fossil fuels.
In 2022, India’s 27 per cent exports of iron, steel and aluminium products worth USD 8.2 billion went to the EU. India and many other countries have raised concerns about the EU’s carbon border adjustment mechanism with the World Trade Organization (WTO). As an additional effort to reduce carbon emissions and to protect the Indian exporters, the government has asked the EU to give recognition to its Carbon Credit Trading Scheme (CCTS), which is under preparation by the power ministry. This would help Indian companies to reduce additional burden in the form of carbon taxes. India is also seeking for exemption of MSMEs from carbon taxes in certain sectors to protect the domestic industry.
Here are some of the potential benefits of the EU carbon tax:
Reduced carbon emissions: The EU carbon tax is designed to reduce carbon emissions by making it more expensive to produce goods using high-emitting energy sources. This could lead to a shift to cleaner production methods and a reduction in overall carbon emissions.
Increased investment in low-carbon technologies: The EU carbon tax could lead to increased investment in low-carbon technologies, as companies seek to avoid the tax by developing more efficient ways of producing goods. This could lead to a faster transition to a low-carbon economy.
Increased innovation: The EU carbon tax could lead to increased innovation in low-carbon technologies, as companies seek to avoid the tax by developing more efficient ways of producing goods. This could lead to a more competitive and innovative global economy.
The overall impact of the EU carbon tax on global trade is difficult to predict. However, it is clear that the tax could have a significant impact on the global economy. It is important to carefully consider the potential impacts of the tax before implementing it and to make sure that it is implemented in a way that minimizes the negative impacts and maximizes the positive impacts.
(This article is written by Anusha Suresh, Articled Assistant in R V K S And Associates)