In a significant move that aligns with global environmental consciousness and economic regulations, India is actively considering the implementation of its own carbon tax framework, drawing inspiration from the European Union’s proposed Carbon Border Adjustment Mechanism (CBAM). This development, discussed at length among senior officials and industry stakeholders, seeks to apply carbon taxation norms independently, a contrast to the EU’s CBAM, which envisions shared taxation proceeds. However, this shift towards a sovereign carbon tax system raises various questions, including the feasibility of a countervailing tax on imports from the EU and its compatibility with the World Trade Organization (WTO) rules.
A Glimpse into the Proposed Framework
At the heart of this proposal is the idea that India would collect carbon tax proceeds directly, bypassing any revenue sharing with the EU. Specifically, the tax would be applicable to Indian exports destined for European nations, targeting products affected by CBAM. This move underscores India’s commitment to align with global climate change initiatives while seeking economic benefits from carbon pricing.
Tax Calculation and Selective Application
The proposal suggests that the tax or levy on exports to the EU will be calculated using a method akin to the one employed by CBAM, considering overall emission-reducing efficiency (ER). However, this taxation will be limited to select products that India intends to export to European countries. This selective approach raises discussions about its constitutionality, a critical aspect that needs thorough examination.
The EU’s Perspective
From the EU’s viewpoint, the central concern revolves around price equivalence rather than equivalent emission reductions. For India to gain acceptance for such a law, an agreement with the EU is imperative. This agreement should encompass key aspects, including data collection and verification. It’s important to note that the EU has already adopted rules governing the implementation of CBAM, marking the start of its transitional phase on October 1, 2023, which will run until the end of 2025.
Carbon Pricing and Its Impact
Carbon pricing is a crucial aspect of this entire framework. Notably, carbon credits are a significant component of CBAM, with EU importers having to purchase CBAM certificates starting from January 1, 2026, corresponding to the embedded emissions above the EU-ETS benchmark levels. These certificates are priced at €85 per tonne of CO2, with a progressive increase anticipated. This pricing mechanism directly impacts industries, especially those with high emissions like steel and aluminium.
India’s Unique Challenges
India faces unique challenges when it comes to carbon emissions. For instance, the country’s aluminium sector is among the highest greenhouse gas emitters globally. The top two aluminium smelters in India emit approximately 20.92 tonnes of CO2 per tonne of aluminium produced, in stark contrast to global players like Rio Tinto and Alcoa Corp, which boast significantly lower emissions per tonne. Similarly, the steel sector exhibits higher CO2 emissions compared to the global average, making it imperative for India to address these issues comprehensively.
Counter Measures and Carbon Markets
Indian officials have also floated the idea of counter-tax measures on EU imports, although the validity of such measures remains under scrutiny. The compatibility of these taxation policies with WTO regulations is a primary concern. Moreover, Indian policymakers are exploring the possibility of linking India’s emerging carbon markets with the EU’s Carbon Credit Trading System, an endeavour that presents its own set of challenges.
In conclusion, India’s consideration of its own carbon tax framework in line with the EU’s CBAM principles reflects the country’s commitment to environmental sustainability and economic adaptability. However, the path forward requires careful deliberation, encompassing legal, economic, and environmental dimensions, to ensure a harmonious transition into this new era of carbon taxation.
