On impact of EU’s proposed carbon border tax
The EU will collect the carbon border tax from January 1, 2026. But the EU is not alone. The UK, Canada, Japan and the USA are also bracing up to levy such tariffs on imports. Most developed countries will have some form of carbon tax between 2026-28. As developed countries account for over half the world trade, such a tax will cause significant trade disruption, weaken WTO (World Trade Organization) and FTA (Free Trade Agreement) obligations and render ongoing negotiations ineffective.
On changing nature of trade regimes of developed countries
Developed countries led the globalisation efforts and traded most products at zero or low duties. More than 60% of imports enter developed countries at zero duty, and their average tariffs are less than 3%. The new 20-35% tariffs change the character of their trade regime. Expensive inputs will make their exports uncompetitive. It will also be a big blow to global trade. Exports from developing countries will suffer the most.
On extension of the tax to all products by 2034
Carbon border tax will affect lakhs of small and big firms. The EU will collect it initially on steel, aluminum, cement, fertilizer, hydrogen and electricity. But the product list will gradually expand, and by 2034 all products will attract this tax. India’s 40% of global merchandise exports go to the European Union, the UK, Canada, Japan and the USA. The rates will vary from product and production process. The tax rates are not fixed. They would be calculated for each consignment. Rates would depend on a product’s emission intensity including embedded emissions. These could be different for different manufacturing units spread worldwide. For example, carbon border tax for cement could be 90% of the product value. For the steel made using a blast furnace, the rate may be about 20% of the product cost.
On onerous data requirement
Each small and big unit intending to export to the EU must capture the emission details at a granular level and share these with its EU counterpart importers. The EU-based importer will calculate the total emission of imported products and buy carbon certificates from EU authorities. The current trading rate at the EU Emission Trading System is 100 euros per ton of carbon dioxide emitted. If the data submitted is not considered satisfactory by the EU, they will charge the highest default tax rate. This will assume product emissions to be the worst 10% of European companies.
On FTA commitments
Carbon border tax will make FTAs with developed countries one-sided. For example, 85% of India-Japan trade occurs at zero import duties. When Japan implements such a tax, Japanese products will continue to enter India at zero duty. Still, Indian products must start paying carbon tax even though regular customs duties are zero due to FTAs. As India negotiates FTAs with the UK, EU and Canada, it must seek clarification. This new tax should be the top agenda for any FTA discussion of India. This carbon tax will invite retaliation and harm the progress made through the Paris Agreement. Global warming is our shared concern. And the solution will be shared and it lies in meeting Paris Agreement commitments.