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Fairness Concerns Cloud EU’s CBAM

Sonal Desai


While definitive implementation of Carbon Border Adjustment Mechanism or CBAM is a year and a half away, this transition period is unveiling the magnanimity of challenges.

EU will impose CBAM taxes on new products between 2026 and 2034. All imports of materials and goods into the EU will be subject to CBAM taxes by 2034.

Based on GHG emission intensities, the EU’s CBAM aims to level the playing field for Emissions Trading System (ETS) firms. But, it also raises concerns about fairness and implications.

CBAM’s disproportionate impact on developing countries may hinder economic growth and global market dynamics severely. It places the onus of decarbonization on developing countries.

Developed countries bear more climate mitigation burden due to their 79 percent historical carbon emissions. CBAM goes against Paris Agreement’s principle of common but differentiated responsibilities, imposing environmental standards on developing countries.

Experts believe by doing so, it disregards developed nations’ disproportionate contribution to climate change. I want to recall here developing countries expressed concerns about the negative effects of unilateral trade measures like CBAM on their economies during COP28.

The impact:

A new analysis from Centre for Science and Environment (CSE) India predicts a 0.33 percent decline in Africa’s GDP under partial coverage of products and phasing out free allowances, and a 0.12% decline in India’s GDP under €40 carbon price assumptions.

In 2022-23, India’s total exports to the EU were primarily covered by CBAM-covered goods.

The EU will begin collecting carbon taxes on every shipment of steel and aluminum on January 1, 2026, requiring Indian companies to pay tariffs equal to 20–35 percent of the total.

This presents a big obstacle for the metal industry in India. The country exported $8.2 billion worth of iron, steel, and aluminum products to the EU in 2022, accounting for 27% of its total exports.

Although CBAM also covers cement, fertilizer, electricity, and hydrogen, India does not export any of these goods to the EU.

The tax burden for 2022-23 is projected to be 0.05 percent of India’s GDP. Over the past two decades, OECD countries have imported emissions on a net basis, as their consumption emissions outweigh their production emissions.

Between 1990 and 2021, the EU imported 19% of its emissions annually from abroad, outsourcing a significant portion. However, its 2019 emissions per capita were 6.5 GtCO2, thrice as high as India, and 43 times higher than Ethiopia.

The impact on the Indian MSMEs:

Although, the latest details of the Indian MSMEs contribution in exports to the EU are not available, a Global Trade Research Initiative report said that MSMEs contribute 45% to India’s total exports and 38% of manufacturing output.

As per DGCIS, despite an increase in MSME exports from $154.8 billion in FY20 to $190 billion in FY22, the share of MSME-specified products in exports declined from 49.77% in FY 2020.

A NITI Aayog report on MSME exports released in March this year said, “Exporting is crucial for Indian MSMEs to break away from dwarfism and unlock their true growth potential. Exporting can allow 54 lakh (5.4 million) manufacturing MSMEs to tap into new markets and expand their customer base, leading to increased revenue and profit.”

How effective are the counter measures?

To counter a CBAM, measures such as implementing a domestic carbon price through a domestic carbon market are suggested. India’s Carbon Credit Trading Scheme (CCTS), led by the Bureau of Energy Efficiency, is developing a domestic compliance carbon market. Still, its readiness to offer EU equivalent carbon prices remains uncertain.

The EU may not consider India’s initiatives for decarbonization, such as non-fossil power targets in its Nationally Determined Contributions (NDCs). This is because the CBAM relies on carbon pricing as a matrix to determine the taxation of exporting country goods.

Overemphasis on carbon pricing overlooks non-pricing efforts, undermining effectiveness and disincentivizing alternative decarbonization measures in CBAM, as acknowledgment for these initiatives is lacking.

Additionally, India is pursuing measures to protect its interests and promote sustainable development, including a carbon credit trading system and renewable energy capacity targets. To offset increased trade costs under CBAM, India should convert energy taxes into carbon price equivalents for export calculations. Additionally, it may seek FTA exemptions for the MSMEs to shield them from CBAM-related trade restrictions.

A positive outcome:

The CBAM rollout may prompt the development of robust carbon accounting methods and protocols for domestic industries to initiate emissions monitoring and reporting.

Decarbonization in exporting countries’ manufacturing sectors necessitates comprehensive mitigation strategies and sustained international financing to support these efforts.

The carbon border tax, currently affecting only 1.64 per cent of India’s total exports, is an additional tax burden and trade barrier.

Decarbonization is unlikely to be incentivized in jurisdictions outside the EU. This is because developing countries are expected to fund it entirely through their domestic budgets without EU support.

Conclusion:

The CSE reports that the EU’s introduction of the CBAM will result in a 25% tax on India-exported carbon-intensive goods.

The report suggests a 0.5% tax burden on India’s GDP in 2022-23, with a counter-tax imposed on rich countries historically responsible for climate change.

The CSE report also suggests a ‘historical polluter’ counter-tax on rich countries responsible for climate change, enabling non-historical countries to finance their decarbonisation efforts.

We agree that India should develop a domestic mechanism to counter the severe effect of CBAM on Indian enterprises. In simple words, this means that we will see our domestic carbon markets evolving at must faster pace.


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What Is Fueling India’s EV Growth?

Sonal Desai


According to Motor Intelligence, the size of the Indian electric vehicle (EV) market is projected to be $34.8 billion in 2024 and is anticipated to grow at a compound annual growth rate (CAGR) of 22.92% to reach $120 billion by 2030.

Based on speed, the market is divided into three segments, according to Custom Market Insights: less than 100 mph, 100 to 125 mph, and more than 125 mph. With a market share of 45% in 2022, less than 100 mph dominated the market and is predicted to continue to do so throughout the forecast period of 2024–2032, significantly influencing the EV market.

EVs have a bright future in India:

India’s EV sales are still quite low, the report notes. China’s market may have reached a certain level of maturity, but the elimination or reduction of some subsidies in China, Europe, and India has hurt the country’s chances of making more sales in the future.

All these factors, including new emissions regulations like those proposed by the US Environmental Protection Agency, a resurgence of interest in the commercial fleet market, and recent price reductions for many EV models, should continue to drive growth.

Moreover, targeted legislative incentives are providing the growth impetus.

So, what is changing in India?

EV sales will be able to continue growing at their current rates, especially in Europe. However, it seems that things are going differently in Developing economies and emerging markets (EMDEs). For instance, companies like Exicom in India are starting to look to the capital markets to finance their expansion into electric vehicles. Announcements of new capital projects and increased capacity for battery production are positive indicators for the global industry.

Concessional financing has aided in the development of mass transit public transportation in EMDE areas. Examples of these projects include Senegal’s all-electric Bus Rapid Transit system, which is partially funded by the World Bank, and India’s deployment of 50,000 electric buses along with charging infrastructure.

By 2030, India wants to sell 30% of its cars as electric vehicles. The Indian government has introduced various schemes, including grants and subsidies, to stimulate the development of alternative fuel infrastructure and spur the expansion of charging stations. Two of these stand out:

i. Duty Reduction for EV Imports: Under the new regulations, vehicles with a minimum CIF value of $35,000 and above will only pay 15% of customs duty. The program will be in effect for five years, provided the manufacturer establishes domestic facilities within three years of going on sale.

ii. After the successful launch of FAME 2, the Indian government is expected to unveil the Rs 10,000 crore FAME 3 scheme within the first 100 days of its tenure. The program will be similar to FAME 2, which came to an end in March 2024, and will offer financial incentives for government-owned buses, three-wheelers, and electric two-wheelers.

The global scenario:

A new World Energy Investment report states that because of the recent drop in battery prices and the ongoing price wars among EV manufacturers as they fight for market share, the transportation industry may grow even slower than in the past.

EV sales in certain significant EMDE are poised to soar due to the arrival of Chinese manufacturers in Latin America and the expansion of the EV industry in India. Policies like the US Inflation Reduction Act and Europe’s Carbon Border Adjustment Mechanism that aim to onshoring manufacturing capacity should lead to an increase in spending on EV production outside of China.


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Global Carbon Pricing Revenues Top $100 Billion

WriteCanvas News


In 2023, carbon pricing revenues reached a record $104 billion, according to the World Bank’s annual “State and Trends of Carbon Pricing 2024” report.

Key findings:

Large middle-income countries including Brazil, India, Chile, Colombia, and Türkiye are making strides in carbon pricing implementation.

While traditional sectors like power and industry continue to dominate, carbon pricing is increasingly being considered in new sectors such as aviation, shipping, and waste.

Currently in a transitional phase, the EU’s Carbon Border Adjustment Mechanism, or CBAM is also encouraging governments to consider carbon pricing for sectors such as iron and steel, aluminum, cement, fertilizers, and electricity.

The India story:

India legalized a carbon market in 2022, establishing an ETS based on existing energy efficiency schemes in emission-intensive sectors, potentially evolving into a compliant carbon market.

Countries like India, Indonesia, Morocco, Türkiye, Ukraine, Uruguay, and the Western Balkans are implementing or considering direct carbon pricing to reduce compliance costs and capture EU revenue.

Government crediting mechanisms have been launched in five jurisdictions since 2023, bringing the total to 35 globally. 11 jurisdictions are considering carbon crediting mechanisms, including India revising its carbon pricing plans and Thailand upgrading its domestic crediting mechanism to Premium T-VER for international buyers.

Overestimation of cookstove impacts underscores need for accurate assessment methodologies. China and India remain largest host countries, but issuance volumes decrease 40% annually.

Carbon taxes and emissions trading systems currently cover 24% of global emissions, with significant progress in middle-income countries like Brazil, India, and Turkey. These countries recognize the need for climate action and the role of carbon pricing in climate mitigation strategies.

New carbon credit sources are emerging, and middle-income countries are integrating crediting frameworks into their policies. China, the EU, India, and Vietnam are relaunching their schemes, with voluntary action accounting for most demand, while compliance demand is slowly building.

Challenges:

Despite record revenues and growth, global carbon price coverage and levels remain too low to meet the Paris Agreement goals.

Currently, less than 1% of global greenhouse emissions are covered by a direct carbon price at or above the range recommended by the High-level Commission on Carbon Prices to limit temperature rise to below 2ºC.

The Paris Agreement’s temperature goals require urgent action to align mitigation efforts with cost-effective policies like carbon pricing. Implemented carbon taxes and emissions trading systems cover a quarter of global emissions, with revenue exceeding $100 billion in 2023.

The report notes that closing the implementation gap between countries’ climate commitments and policies will require much greater political commitment.

However, concerns over market integrity persist, leading to declining market activity and a growing pool of non-retired credits.

Data:

There are now 75 carbon pricing instruments in operation worldwide. Over half of the collected revenue was used to fund climate and nature-related programs.

When the first report was released, carbon taxes and Emission Trading Systems (ETS) covered only 7% of the world’s emissions. According to the 2024 report, 24% of global emissions are now covered.

“Carbon pricing can be one of the most powerful tools to help countries reduce emissions. That’s why it is good to see these instruments expand to new sectors, become more adaptable and complement other measures,” said Axel van Trotsenburg, World Bank Senior Managing Director. “This report can help expand the knowledge base for policymakers to understand what is working and why both coverage and pricing need to go up for emissions to go down.”

The way forward:

Governments are also increasingly using carbon crediting frameworks to attract more finance through voluntary carbon markets and facilitate participation in international compliance markets.


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