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EDITORIAL ANALYSIS : International trade has a carbon problem

 

 

Source: The Hindu

 

  • Prelims: Current events of international importance, carbon tax, EU, CBAM, emissions trading system (ETS), COP, G20 etc
  • Mains GS Paper II: Bilateral, regional and global grouping and agreements involving India or affecting India’s interests, Important international institutions etc

 

ARTICLE HIGHLIGHTS

  • The European Union’s (EU) key climate law, the Carbon Border Adjustment Mechanism (CBAM), has spooked India.
    • India fears that CBAM will cripple the export of its carbon-intensive products to the EU.

                          

INSIGHTS ON THE ISSUE

Context

Carbon Border Adjustment Mechanism (CBAM):

 

Challenges associated with CBAM:

  • India’s exports may be limited to aluminum, iron, and steel, and affect only 8(one point eight)% of its total exports to the EU
  • Protectionism: India has reportedly decried CBAM as being protectionist and discriminatory.
  • WTO: It allows countries to adopt unilateral measures for safeguarding the environment
    • environmental protection should not become a smokescreen for trade protectionism.

 

Background of ETS and CBAM :

  • In 2005, the EU adopted a climate change policy known as the Emissions Trading System (ETS).
  • ETS is a market-based mechanism that aims at reducing greenhouse gas (GHG) emissions by allowing bodies emitting GHG to buy and sell these emissions amongst themselves.
    • It has a mechanism for its domestic industries
    • Emissions embedded in products imported from other countries may not be priced in a similar way due to a lack of stringent policies or due to less stringent policies in those countries.
  • The impacted industries in the EU receive free allowances or permits under the ETS.
  • The EU apprehends the phenomenon of ‘carbon leakage’, that is, due to the application of ETS, European firms operating in carbon-intensive sectors might possibly shift to those countries that have less stringent GHG emission norms.

 

CBAM:

  • It is aimed at addressing this quagmire(leveling the playing field for the EU industries).
  • Imports of certain carbon-intensive products, namely cement, iron and steel, electricity, fertilizers, aluminum, and hydrogen, will have to bear the same economic costs borne by EU producers under the ETS.
  • The price to be paid will be linked to the weekly average of the emissions priced under the ETS.
  • However, where a carbon price has been explicitly paid for the imported products in their country of origin, a reduction can be claimed.

 

CBAM and WTO:

  • A cornerstone principle of WTO law is non-discrimination.
  • Countries are required to accord equal treatment to ‘like’ products irrespective of their country of origin (most-favored nation treatment) and to treat foreign-made ‘like’ products as they treat domestic ones (national treatment principle).
  • CBAM’s design is origin-neutral in appearance.
    • It discriminates between goods from different countries on account of:
      • An inadequate carbon pricing policy
      • Due to onerous reporting requirements that importers would be subject to.

 

Challenges:

  • Whether the carbon-intensive products to which the CBAM applies are ‘like’.
  • While steel products may appear similar.
    • The process by which electric arc furnaces produce steel is less carbon-intensive than the steel produced in blast furnaces.
  • Products that are not ‘like’, the rules on non-discrimination would have little application in such a case.

 

WTO jurisprudence:

  • CBAM violates WTO law for discriminating between EU and foreign products covered by CBAM based on the embedded emissions.
  • General Exceptions clause(Article XX):There could be a claim for justifying it under the General Exceptions clause given in Article XX of the General Agreement on Tariffs and Trade (GATT).
    • Under Article XX, measures taken by countries that otherwise violate GATT obligations are permitted if:
      • They fall under one of the listed policy grounds
      • They satisfy the requirements of the introductory clause of Article XX, known as the chapeau.
    • One of the listed policy grounds in Article XX is ‘conservation of exhaustible natural resources’.
      • CBAM would fall under this category.

 

Way Forward

  • CBAM only considers ‘explicit’ carbon prices, not ‘implicit’ costs (non-price-based costs) borne by products originating in certain countries.
    • Accordingly, it arbitrarily or unjustifiably discriminates between countries where the same environmental conditions exist.
  • CBAM is an important issue in the ongoing India-EU free trade agreement negotiations: India should work with the EU to secure gains on CBAM and ensure smooth onboarding for Indian exporters to maximize the benefits of a bilateral deal, even as the possibility of a WTO challenge remains open.

 

QUESTION FOR PRACTICE

Describe the major outcomes of the 26th session of the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC). What are the commitments made by the India conference? (UPSC 2021) (200 WORDS, 10 MARKS)