National Council of Applied Economic Research
Opinion: Suvajit Banerjee and Sovini Mondal.
It is apparent that through CBAM, the EU wants to intimidate non-EU nations into adopting its self-proclaimed position as climate leader.
Protectionism is a threat to the collaboration required between the developed and developing world in addressing climate issues. Innovative protectionist ideas, such as the European Union’s Carbon Border Adjustment Mechanism (EU-CBAM), the Corporate Sustainability Due Diligence Directive, and the EU Deforestation Regulation, have led to concerns in developing nations. India has criticised the EU-CBAM, in particular, as being “arbitrary”.
A ‘discriminatory’ tool
The CBAM is meant to ensure that imported products bear a carbon emission cost comparable to the cost imposed on goods produced within the EU. Exporters will be mandated to provide information on the quantity and emissions of their goods and buy certificates to match those emissions. The definite phase of the CBAM will enter into force on January 1, 2026. This may pose significant risks to India’s international trade. The EU comprises 20.33% of India’s total merchandise exports, of which 25.7% are affected by CBAM. During the last five fiscal years, iron and steel have accounted for 76.83% of these exports, followed by aluminium, cement, and fertilizers.
In recent editions of the Conference of the Parties (COPs), India has said that CBAM is “discriminatory” and called on developing countries to establish a coordinated response to what it considers as an unjust transfer of responsibilities. The CBAM is attracting considerable attention at COP29 in Baku. However, under-prepared arguments presented at COP29 could undermine India’s credibility as a leading voice of the Global South.
It is important to recognise that not all developing economies share the same economic aspirations as India, nor will they be equally affected by the impacts of climate change. Therefore, perceptions regarding CBAM are complex even within the developing world. Issues related to multilateral and bilateral trade and cultural ties between developed and developing economies influence the tone of their arguments. The current production-based accounting principle practiced under the United Nations Framework Convention on Climate Change (UNFCC) includes the emissions resulting from the production of exportable commodities within the emission inventory of the exporting nation. The exporting nation is held accountable for the reduction of these emissions, even though these products are not consumed within its domestic market. As a result, many developing economies with less stringent emission reduction measures are accused of climate change when they export more.
The proposed arguments
Therefore, India’s arguments should also align with other developing countries’ agenda, if India wishes to speak like a leader. The following could be some of the arguments. First, on the time for preparing for CBAM. With administrative deftness, the EU set a target to reduce greenhouse gas (GHG) emissions by 20% compared to 1990 levels by 2020; this is outlined in the EU Climate Action and Renewable Energy Package in 2008. Following the accomplishment of these targets, the European Green Deal was unveiled in 2019, extending the emission reduction target to 55% below the 1990 levels in a Fit for 55 Package. Does the CBAM offer developing economies a matchable time to adapt?
The second is on empowerment. The EU has decided to keep the revenues generated from the CBAM as its resources, which will be used to fund the NextGenerationEU recovery tool and operate the CBAM. Depending on the mechanism’s ultimate design, the anticipated additional money generated by CBAM for 2030 is estimated to be €5 to €14 billion annually. Is it appropriate for the EU not to share this revenue with non-EU trading partners? Doing so may contribute to capacity building and technology transfer in developing economies.
Third, there is the issue of quantifying emission reduction responsibilities. India can justifiably advocate for an alternative called Equity-based Accounting (EBA) of Nationally Determined Contributions, which emphasises a collective obligation for emission reductions among trade partners based on the ideas of horizontal intra-generational equity and vertical inter-generational equity. In the context of the EU-CBAM, India can introduce the concept of EBA to the developing world concerning retaliation measures. Using the EBA, a formula can be proposed to calculate the tariff base on imports from the EU, which considers factors such as relative per capita GDP, relative per capita emissions, relative gains from trade, and relative avoided emissions through trade. By expressing the actual emissions embedded in imports in a way that reflects the developmental and historical heterogeneities between trade partners, any developing economy can be better positioned under these new rules of the game, which provide an unbiased evaluation of climate initiatives.
Even the PBA adheres to the principle of Common but Differentiated Responsibilities and Respective Capabilities, which is significantly compromised under the CBAM framework. CBAM does not acknowledge compensatory justice or distributive justice. Consequently, the allocation of emission responsibilities is not equitably assigned to countries based on their historical contributions to climate change or their capacity to mitigate its effects. It is apparent that through CBAM, the EU wants to intimidate non-EU nations into adopting its self-proclaimed position as climate leader.
Suvajit Banerjee, Fellow at NCAER, New Delhi. Views are personal; Sovini Mondal, Research Associate at NCAER, New Delhi. Views are personal