THERE’S NO SUCH THING AS A FREE EMISSION
Hamid Naved
Assistant Commissioner| Indian Revenue Service(customs/indirect taxes)| Ex-Lawyer|
(HEADNOTE- GHG emissions are intimately tied to limited resources, trade and finances, both their reduction and their continued production entails significant financial implications. Climate action efforts must always account for these realities while seeking to straddle the middle-path between inaction and climate injustice.)
(NOTES)
· Endnote links are not working properly, kindly scroll down to the relevant citation number.
· Considering its length, the article is arranged into different sections. Section I deals with the justification and working of CBAM, Section II with CBAM's effects on emissions/developing states' exports, Section III with CBAM's analysis under international trade law and Section IV deals with some ongoing as well as future policy options available with reference to CBAM.
· * This piece was originally published on my blog- https://lawofcomparativeadvantage.blogspot.com/2023/05/theres-no-such-thing-as-free-emission.html
"Simply put, many things are easy to advocate, much harder to do". This was how India’s External affairs Minister S. Jaishankar explained the complexity of public policy issues in his work 'The India Way'.[i] It is easy to formulate suggestions or ideas to resolve policy issues but much harder to implement them, while balancing the interests, of a near limitless number of stakeholders.
Climate change mitigation and the various proposals relating to it capture this challenge extremely well. Carbon emission cuts are easy to advocate, but it is much more complicated to shut down the industries which cause them. Adopting the "Common But Differentiated Responsibility" (CBDR) principle at international forums is easy. The real challenge is to identify those areas which create 'common' or universal responsibilities versus those climate action responsibilities which should be differentiated or kept state-specific, keeping in mind every state’s historical emissions.
All these challenges are amply visible in the context of the Carbon Border Adjustment Mechanism (CBAM), the proposal for which, was originally adopted by the European Parliament in 2021 as part of the ‘Fit for 55’ Package. After constant tinkering to its structure, as of April 2023, the CBAM’s initial phase is planned to be rolled out from October 1, 2023.
The CBAM is a Border Adjustment Tax which will be applied on the European Union’s imports originating from countries not covered by the EU’s own Emissions Trading System (ETS) or any of its linked mechanisms (Switzerland’s ETS for example). The ETS is a form of Carbon Price levying system under which EU industries face emissions caps and must buy emission allowance permits/certificates for every tonne of Carbon dioxide equivalent emissions above this cap. This is a “cap-and-trade” mechanism; industries which stay within the cap can sell their excess emissions allowance to industries which have exceeded the cap.
The EU’s ETS system is the world’s largest internal carbon market in terms of value with a size of €751 Billion in 2022.[ii] The EU however, wishes to bring foreign made goods under its ambit as well. Hence, CBAM’s objective is to ensure that this carbon price or emissions tax is imposed on EU’s imports as well, in addition to domestic manufacturing. The CBAM will target imports from nearly all non-EU countries excluding a few states like Switzerland, Liechtenstein, Norway and Iceland which have their own Emission Trading System linked to the EU’s ETS.
(Note- The ETS mechanism of the EU targets greenhouse gases including carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). [iii] Typically speaking, the global warming potential (GWP) of all green-house gases is benchmarked relative to the additional warming effect of 1 tonne of CO2.[iv] Hence, references in this article to CO2/carbon dioxide should be construed to include the other GHGs as well.)
I. CBAM: Its Working and the Justification
The EU is targeting a 55% reduction in its emissions (1990 as benchmark) by 2030 (‘Fit for 55’) and net-zero carbon emissions by 2050. This, will naturally require significant curtailment of emissions relating to manufacturing which forms about 23% of its total Greenhouse Gas emissions.[v]
The stated intent behind the CBAM is to prevent ‘carbon-leakages’ whereby EU manufacturers simply ‘offshored’ their production to countries lacking any industrial carbon emission caps.[vi] The goods imported from such jurisdictions hence bypass the ETS system as of now. International Trade is associated with about 20-30% of total Carbon Dioxide emissions.[vii] These are the ‘embedded emissions’ contained within imported goods that the EU wishes to target.
Till now, the EU had used ‘free-allowances’ for its own industries to prevent such leakages. Industries in sectors at high risk of carbon price linked offshoring would be given caps within which no carbon price would be imposed. They could emit GHGs within these allowances without requiring emission permits. The EU now plans to phase out these free allowances. Free Allowances will be eliminated completely by 2034 as part of the larger European Green Deal. Consequently, to prevent largescale offshoring and carbon-leakages, the CBAM mechanism is being rolled out, starting from 2023.
(As of 30th April 2023, the CBAM regulation is at the penultimate stage of approval under the European Union’s legislative process. Only formal adoption by the EU members states in the Council of the European Union remains to be completed which will be followed by the regulation coming into force after 20 days of its publication.[viii])
The CBAM will be implemented in a phase-wise fashion. Beginning from 1st October, 2023 EU importers will have to disclose the ‘embedded-GHG Emissions’ of carbon dioxide with respect to imports from sectors including cement, iron and steel, aluminium, fertilisers, electricity and hydrogen (added only recently).[ix] During this transition period importers will be required to assess and submit reports on the embedded carbon emissions present within the goods imported by them.
The actual imposition of the certificate linked carbon price will begin only in 2026. A year before the impositions begin, importers will have to apply for the status of ‘authorised CBAM declarant’. Once enforced, it will require EU importers to purchase CBAM certificates equivalent to the total emissions embedded within the imported goods. The certificates will be valid for 2 years and the importers would also bear the burden of ensuring independent verification or auditing of emission calculations. The embedded carbon would be priced equal to the weekly average auction price of EU’s ETS carbon emission allowances.[x] This is the stage at which exporters to the EU will begin to face escalation in the prices of their exports. The European Commission has been assigned the responsibility to develop procedures against ‘circumvention practices’ which seek to avoid the CBAM certifications. This will naturally involve penalties in case circumvention of CBAM certificate purchase obligations or deficiencies in the reporting of embedded emissions is proven.
As the CBAM kicks in, the EU will simultaneously begin the phase-out of free allowances between 2026 to 2034. This will achieve the EU’s goal of placing carbon prices on the production of both imports into the EU and its own domestic production, at least for the sectors covered under CBAM.
Crucially, it is at the end of the transition period, that the European Commission will decide on the question of extending CBAM beyond the original six commodity groups and extending the scope of CBAM to cover indirect emissions too. [xi] Till 2034 CBAM is meant to only target emissions which directly arise from the production process itself (Scope 1 emissions) and not for example, the emissions released due to the electricity or transport services used to facilitate production (also known as Scope 2 Emissions).
II. The Anticipated Effects of CBAM: On Trade, Emissions and Developing States
The UNCTAD, in response to the initial push for the CBAM in 2021, had published a report detailing the likely effects of the CBAM on both Climate Change as well as the exporters impacted by the mechanism.[xii] The report acknowledges the problem of ‘Free-Riding’ by states on the mitigation efforts by other states, like the ‘Carbon-Leakages’ issue which has been used to justify CBAM. However, it also noted that climate fairness demands recognition of the need to account for differences in economic conditions and historical responsibility for emissions. To contextualize climate fairness, India which holds about 17.7% of the global population is only responsible for around 4% of global cumulative emissions between 1850-2019.[xiii]
As per the UNCTAD report “the developing countries most exposed to the CBAM would be India, Brazil and South Africa, while Mozambique would be the most exposed LDC.”[xiv] An estimated $16 Billion worth of developing country exports to the European Union could be affected by the CBAM being applied to all the goods currently covered by the EU’s ETS.[xv] Carbon border adjustment measures could potentially increase poverty in the targeted developing and LDC states due to their excessive reliance on “Emissions Intensive Trade Exposed Industries.” [xvi] (For example, the glass manufacturing sector is labour intensive even as its products tend to have significant amount of embedded Carbon dioxide emissions per unit).
However, it is interesting to note, particularly from an Indian perspective, that the exact impact of CBAM on import tariffs would depend upon the actual carbon intensity of production. In this context, a Boston Consulting Group report has found that Turkey and India could gain a price advantage over Chinese and Russian steel exports due to the latter’s higher embedded emissions intensity.[xvii] (This is linked to the higher share of relatively low emission steel minimills in India and Turkey.)
The UNCTAD report also carried out an impact-modelling exercise to estimate, in quantitative terms, the impact of the CBAM on both total emissions and effects on trade. [xviii] The Findings: at a $88 per tonne carbon price levied on embedded emissions there would be a 2.4% drop in the exports by developing states, at a $44 price this figure would be 1.4%. India would be the 7th most exposed economy in terms of aggregated value of affected exports. What about the all-important effect on mitigating carbon emissions? The CBAM is estimated to reduce only 0.1% of global Carbon dioxide emissions.[xix] For some context, ETS allowances have been trading at $95 per tonne of emissions as of April 28, 2023 and had breached the $100 mark repeatedly in the first quarter of 2023.[xx]
Even as these numbers may change, it is highly probably that the CBAM will not itself drastically reduce climate change. However, what it can do is catalyse the global implementation of carbon prices and emissions caps for industries. Nevertheless, global transition to low emission paths must always be reconciled with goals of sustainable economic development and poverty eradication as was reaffirmed by state parties to the UNFCCC at ‘COP 27’.[xxi] This is the dilemma faced by most taxation measures which target negative externalities or ‘Pigouvian’ taxes.
Targeting negative externalities (carbon emissions) itself generates additional unwanted outcomes. In the present case this involves distorting export competitiveness, job-losses faced by employees at older carbon-intensive production units and increased regulatory compliance burdens for both EU importers as well as energy-auditing burdens for the exports production units.
III. CBAM and International Trade Law
That, the European parliament was confident of the CBAM’s compatibility with the WTO framework is more than visible in the title of the resolution; “A WTO-compatible EU carbon border adjustment mechanism” adopted by it on March 10, 2021.[xxii] Nevertheless, CBAM has yet to be tested by the WTO’s dispute settlement panel vis-à-vis its legality. This section enlists the provisions of the General Agreement on Tariffs and Trade (GATT) as well as other principles of international trade law which may affect the CBAM’s implementation.
The WTO’s dispute settlement mechanism provides the institutional framework for adjudicating interstate disputes over trade measures and reviewing such measures under the WTO linked legal regime. The mechanism is actualised via the WTO’s dispute settlement body.[xxiii] The adjudication of disputes is carried out at two levels. The first stage involves Dispute Settlement panels constituted by the DSB with any appeals against such rulings going to the Appellate body.
To begin with any adjudicating body will have to decide on the CBAM’s nature as an import tariff measure. The WTO’s Appellate body held in the China-Automobile Parts[xxiv] report that charges imposed on goods which accrue “by virtue of the event of importation” will constitute an import measure and not an internal regulation. The CBAM (post 2026) will obligate importers to purchase CBAM certificates based on the emissions in the goods imported by them, hence linking CBAM to the ‘event of importation’, making a reasonable case for CBAM to be treated as an import measure subject to the provisions of the GATT.
GATT Article I contains the principle of ‘General Most-Favoured Nation Treatment’ (MFN) which is fundamental to the multilateral trade regime.[xxv] Any advantage or concession in trade provided to imports for any specific country must be unconditionally extended to ‘like’ products from all GATT contracting parties.
The European Union itself forms a common-market in line with Article XXIV GATT which allows formation of customs unions or Free-trade area allowing it to frame differential tariff policies for intra-EU trade and trade with Non-EU states.[xxvi] A potential defence is likely to be that the CBAM is targeting exports from nearly all non-EU states fulfilling requirement of MFN treatment. However, as noted elsewhere in this article, the EU may well exempt certain LDCs and developing countries from CBAM. Such exemptions are likely to be contested by states excluded from them.
GATT Article II requires states to provide a schedule listing the maximum rate of import tariffs (bound rate) which they will levy on imported goods originating from contracting parties.
[xxvii] The CBAM is likely to increase the effective import tariffs on the targeted imports beyond the bound rate committed to, by the European Union. As per an analysis by the Global Trade Research Initiative, the CBAM certificates will translate into an effective tariff of 20-35% on the targeted imports, significantly above the average bound tariff rate of 2.2% in the EU WTO schedules.[xxviii]
However, Paragraph 2 of Article II allows imposition of tariffs over and above the bound rate if such charges are meant to be ‘equivalent’ to an internal tax imposed on a ‘like domestic product’. The EU hence, is likely to contend that the CBAM’s imposition on targeted imports is merely equalising its tariffs with its internal emissions ‘cap-and-trade’ system. (However, as pointed out later in this piece the EU’s granting of free allowances might weaken this equivalence).
This issue is also tied to GATT Article III which prohibits differential treatment by states with respect to imports and domestic products, particularly from a protectionist perspective (Principle of National Treatment). Article III:2 also prohibits the application of internal taxes or charges to imported products in ‘excess of those applied, directly or indirectly, to like domestic products.’ In EC-Asbestos the appellate body held that ‘likeness’ of an imported product to a domestic product could depend on health risks associated with the former (in this case Asbestos fibres), in case such health risks influenced consumer habits.[xxix] This means that the EU will have to prove that consumer habits do differentiate between goods based on their embedded carbon emissions.
As per James Bacchus, a former chairperson of the WTO’s appellate body, it is the MFN principle (Article I) and the National Treatment principle (Article III) that the CBAM is most likely to conflict with.[xxx] Bacchus has pointed to the continued provisions for ‘free-allowances’ for emissions by EU producers as a source of concern. These allowances, as stated above, will continue till 2034 even as CBAM certificates become obligatory for importers by 2026. This may end up providing significant benefit to EU producers vis-à-vis exports of like products depending on the extent of benefits received by these producers on account of the free allowances.
If, the emissions pricing under CBAM exceeds the cost of ETS based carbon permits (after including free allowances benefits), then the EU may not be able to claim immunity for CBAM under Article II:2a (Paragraph 2a) as the charge is no longer ‘equivalent’ to the internal tax. This will also lead to a violation of the principle of national treatment under Article III:2. In fact, Bacchus contends that the free-allowances, in so far as they extend to products meant for exports, are “arguably already illegal” under the Agreement on Subsidies and Countervailing Measures.[xxxi]
The defence by the EU against these claims will likely involve a reference to GATT Article XX which provides the general exceptions to the provisions of GATT. [xxxii] Specifically, Article XX(b) providing exemption to measures “necessary to protect human, animal or plant life or health” and Article XX(g) covering measures for “conservation of exhaustible natural resources” are likely to be claimed as part of any defence against illegality of CBAM.
For example, in US Gasoline[xxxiii] the WTO appellate body recognized that member states could take measures to control air pollution and to protect the environment as long as these measures were in line with the principles of the GATT. Given the scientific consensus on the limited carbon budget available to prevent irreversible catastrophic climate change, the EU could argue that a ‘low-carbon dioxide atmosphere’ is indeed an ‘exhaustible natural resource’ which the CBAM seeks to protect. (The issue of carbon budget is covered below).
Additionally, the chapeau (introductory paragraph) of Article XX lays out certain pre-conditions before an import measure can claim an exception under the GATT. It prevents the use of the exceptions to justify measures which are a (A) ‘disguised restriction on international trade’ nor should they (B) ‘constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail.’ Based on the past decisions under the WTO’s dispute settlement mechanisms, it becomes apparent that these conditionalities under the chapeau are likely to present a significant barrier to clear for CBAM, over and above the specific conditions under Article XX(b) and XX(g).
In the US-Shrimp[xxxiv] decision, the WTO appellate body held that member states should refrain from applying measures which “require other members to adopt essentially the same comprehensive regulatory program, to achieve a certain policy goal, as that in force within the member’s territory, without taking into consideration different conditions which may occur in the territories of those members.” The EU’s carbon price is among the highest globally[xxxv] and hence, equating the CBAM with the weekly ETS carbon prices can likely be argued to be inconsiderate of the different economic conditions globally. (Instead, a differentiated floor price for carbon for different states may be a better solution as suggested by an IMF paper cited later in this article.)
The ruling in the Brazil-Retreaded Tyres[xxxvi] case may also be applicable for scrutinizing CBAM. Here, the appellate body acknowledged that measures adopted to respond to global warming and climate can only be evaluated with the benefit of time. This raises the potential for CBAM’s long-term effect on emissions to be accounted for in any legal challenge faced by it.
The prohibition of ‘unjustifiable discrimination’ between countries with the same prevailing conditions will also create a potential legal challenge to any exemption from CBAM given by the EU to a select group of states. For example, in US-Shrimps the panel found that the US was (wrongfully) providing technical and financial assistance to aid countries in meeting its shrimp import-regulations to a select group of states while denying the same assistance to the complainant states (which included India).[xxxvii]
Given, that the WTO appellate body is currently (April 2023) dysfunctional, states may well respond to the CBAM via retaliatory trade measures in the absence of an enforceable dispute settlement option. One Indian trade expert (Abhijit Das) has, in this context, argued that India may respond to CBAM via its own carbon border adjustment tax, but one which targets the per-capita emissions generated, hence affecting developed country exports to a greater extent.[xxxviii] To conclude, the CBAM will have to pass muster under multiple grounds of legal challenges with respect to the various WTO linked agreements.
IV. CONCLUSION: SOME PARTING THOUGHTS ON THE ZERO-SUM APPROACH IN GLOBAL CLIMATE ACTION EFFORTS
The proposal for CBAM has been criticised for essentially funding the European Union’s own process of decarbonisation via taxes levied on goods which often come from developing states. One expert (R.V. Anuradha) has called it an example of “reverse climate financing.”[xxxix] It is important to understand why the CBAM continues to be pushed by the EU despite its ethical dubiousness and the very practical problem of the opposition that it is likely to receive from developing states (As stated above, some of the proposals include a tax countering the CBAM which will target European states with relatively high per-capita Carbon Emissions).
In practice, Climate action often operates like a Zero-Sum game, this is true for both the domestic sphere as well as the international one. Within India for example most industries seek to minimise the degree of adaptation and decarbonisation that will be imposed on them. For example, at a recent meeting the Indian Coal Industry in fact estimated a future increase in the total demand for coal.[xl] However, the problem is that, as per the IPCC, only a limited carbon budget remains to be used for human activities before irreversible catastrophic climate change is initiated. That is, estimates suggest that humanity has a 50% chance of keeping global warming within 1.5C of Pre-Industrial levels only if the total global emissions remain below 460 Gigatonnes of CO2 equivalent emissions in the next 3 decades.[xli]
One sector’s emissions essentially reduce the carbon budget available to other sectors. Similarly, one nation’s additional emissions correspondingly reduce the carbon budget for other states. This is the situation which creates the Zero-Sum mentality. One of the arguments against Climate Action in the US has been the complaint that other states are simply not doing enough to mitigate emissions, hence rendering any efforts by the US essentially pointless.[xlii] In this context, it is worth noting that India is among the few G-20 member states which have done well on the Climate Change Performance Index.[xliii]
Just like the emissions budget, at any given point of time, there is only a limited amount of climate finance available to fund ‘green’ projects. This amount can be augmented, but only after a significant degree of political lobbying, consumer pressure and the acceptance of accountability for historical emissions. A couple of datapoints will help contextualize the problems with the economics of climate finance. As per the OECD, only about $83.3 billion was mobilized by developed states in 2020, against the commitment to provide $100 billion originally made by them at UNFCCC COP15 in 2009 and later formalised at COP16.[xliv]
Additionally, total climate flows were estimated to be $803 Billion in 2020, at first glance a huge amount, but only equivalent to 31-32% of the annual investment needed to keep temperature rise ‘well below 2 C.’ [xlv] As the title of this piece alludes to, neither the reduction of emissions nor their increase is truly ‘free’, the consequences of both forced emissions-reductions and unchecked emissions, involve huge financial implications, beyond their immediate impacts on climate change. Indeed, the world is entering a phase where carbon emissions are likely to face taxes and ‘cap and trade’ mechanisms across the globe signifying a shift from free to priced emissions.
(At another level, the title also seeks to point out the potential double-standards associated with the concept of 'free allowances' issued by the EU to emit carbon dioxide to its domestic producers even as the CBAM is applied on imports).
The CBAM’s introduction exhibits signs of the Zero-Sum approach to Climate Action at play, the EU’s Priority is to achieve its own Net-Zero Emissions target by 2050 and its own medium term ‘Fit for 55’ plan by 2030. These are the commitments that it has chosen to bind itself with, both legally and formally. What about the CBAM’s other consequences, including inter-alia its impacts on the $100 Billion per-year Climate finance commitment, the dilution of the CBDR principle[xlvi] or even the ethical and legal questions over targeting exporting states (like India) which have essentially negligible per-capita emissions? [xlvii] These may, for all practical purposes, remain secondary issues or priorities compared to the EU’s internal climate action commitments. Hence, a new series of global negotiations are needed to harmonize domestic and international mitigation efforts, especially in the context of trade-related measures.
Fortunately, the actual imposition of CBAM certificates will only be initiated from 2026 onwards. This provides a significant window of opportunity for variation in its terms, a potential rollback of CBAM and international negotiations regarding carbon tariffs on embedded carbon emissions contained in imports. Developing states and their various internal stakeholders can use this opportunity to seek reasonable relaxations or variations in CBAM’s implementation. Public International Law requires a harmonious interpretation to allow the various principles contained within different treaties to be reconciled with each other. (Article 31:3c of the Vienna Convention on the Law of Treaties, for example contains this principle).[xlviii]
The most practical solution to the CBAM’s conflict with the CBDR principle could involve exemptions being given to LDCs and developing countries in line with the Special and Differentiated Treatment provision contained within the enabling clause agreed upon by parties to the GATT in 1979.[xlix] Additionally, reference can be made to Article XXXVI which recognises the need to appreciate, the wide gap between standards of living between states.[l] Indeed, even the European Parliament’s resolution on the matter called for ‘special treatment’ to be given to Least Developed Countries and Small Island Developing States.[li] Though any such exclusions will have to account for the various prohibitions on arbitrary discrimination between countries captured in GATT Article XX’s chapeau, which have been explained in Section III of this article.
Linking of CBAM’s levies to the EU’s climate finance efforts to support mitigation or Loss and Damage compensation for developing states is yet another option. Other international organizations can also aid developing states in complying with the CBAM. The United Nations Office for Project Services (UNOPS) for example, is supporting producers in Vietnam to reduce their carbon dioxide emissions and aid in the impact assessment of CBAM’s implementation on such producers.[lii]
Exclusion, exemption or longer transition periods for developing states may not necessarily defeat the goal of emissions reduction given that even the imports from large developing states like India only form 1% of the total embedded emissions in EU’s imports.[liii] Another means of maintaining climate fairness and balancing trade with development is differential carbon pricing for different states. A paper by the IMF has suggested ‘differentiated floor’ (minimum) prices for carbon equating to $75, $50, and $25 per Tonne of carbon for the United States, China, and India respectively.[liv] This can lead to a 22.6% emissions reduction, relative to the baseline, by 2030 for these 3 states when combined with the pre-existing Nationally Determined Contributions.[lv] Such floor prices can also reduce the scope for ‘carbon-leakages’ or the ‘free-riding’ problem cited by the EU as an additional reason for introducing CBAM, though it will admittedly expose Indian producers to a fairly significant carbon price as well.
With respect to the Indian context, readers can refer to a couple of articles which lay out detailed potential responses by India to the implementation of the CBAM (available in the References section below). However, reference to the Energy Conservation (Amendment), Act 2022[lvi] deserves to be made here. Section 13[lvii] of the Act now allows the Central government to “specify the carbon credit trading scheme”, which has been defined in Section 2 as a “scheme for reduction of carbon emissions.”[lviii] Section 14AA[lix] of the newly amended Energy Conservation Act, 2001 allows the Central Government or any other notified agency to issue carbon credit certificates to entities which comply with requirements of the carbon trading scheme.
Simply put, India will now have a statutory carbon pricing system of its own which will allow exporters to reduce a part of their CBAM linked liabilities by utilising domestically issued carbon emission allowance certificates. (only ‘a part’ as the EU’s Carbon price per unit is likely to significantly exceed India’s domestic carbon pricing). A detailed draft Carbon Trading scheme laying out the Institutional framework for India’s domestic Carbon Credit Trading Scheme was released in March 2023, showing the government’s commitment to the CTS.[lx] China also has its own Emissions Trading System which differs from the EU’s ETS by targeting emissions intensity reductions. Industries which reduce their emissions intensity below industry benchmarks can convert these reductions into surplus allowances which can be sold to industries exceeding emissions industry benchmarks.[lxi] This shows the diversity of options for carbon pricing systems.
Among the sectors targeted by the CBAM include both hydrogen and steel exports to the EU. India’s ‘National Green Hydrogen Mission’ can play an important role in reducing the embedded emissions in these commodity groups, with a target of 5 million metric tonnes of Hydrogen being produced via renewable energy, by 2030.[lxii] It is noteworthy that green hydrogen also has the potential to be used in the production process of steel which can significantly lower the high levels of carbon-dioxide emissions associated with steel production. The Green Hydrogen Mission, in the medium term, can greatly reduce the embedded emissions contained in India's exports and consequently reduce the quantum of border adjustment faced by Indian exporters. (Each Tonne of steel produced currently produces adds 1.8 Tonnes of carbon-dioxide into the atmosphere).[lxiii]
A parting reference may also be made to the India-EU Broad Based Trade and Investment Agreement (BTIA) which is currently under negotiation.[lxiv] India has, in recent years, acquired a trade-surplus of $13 Billion (April-February 2022-23) in merchandise trade with the EU showing the significance of preserving export competitiveness of Indian goods in the European market. [lxv] India should seek clarifications from the EU about its plans for implementation of the CBAM. Discussions could cover inter-alia the possibility of offsetting CBAM obligations through India’s upcoming CTS and imposing differentiated rates of CBAM tariffs based on the exporting state’s per-capita emissions as well as per-capita GDP. Reportedly, issues have already been raised about potential carbon linked tariffs affecting the India-UK FTA negotiations.[lxvi] Alternatively, India can reach out to regional blocs like MERCOSUR, CARICOM and the African Union to present a united front of developing countries. ***(Some exposition on the developing world's dilemma with respect to climate action and a global net-zero by 2050 is available at the end of the article).
The Outcome document of the Twelfth Session of the Geneva Ministerial Conference of the WTO recognized that the multilateral trading system must “promote the UN 2030 Agenda and its Sustainable Development Goals in its economic, social, and environmental dimensions.” [lxvii] However, the same paragraph calls for the recognition of the “respective needs and concerns of Members at different levels of economic development.” [lxviii] The outcome document concludes by referring to the Committee on Trade and Environment as the appropriate forum for dialogue among members on the relationship between trade measures and environmental conservation.
Such dialogues need to be urgently intensified and a draft-proposal prepared for the WTO Ministerial Conference to finalise a balanced solution to future impositions of Carbon emission linked border adjustment taxes. This will help enshrine obligations upon the developed states to provide technical support, impact-assessment services and staggered timelines vis-à-vis developing states in cases of imposition of climate action linked trade measures. A global agreement on incorporating per-capita emissions and per-capita incomes into any carbon border adjustment would be in line with the Special and Differentiated Treatment principle. The ‘differentiated floor’ price suggested by the IMF’s report also helps enhance differentiated treatment.[lxix]
In fact, India has already presented its arguments with reference to the detrimental effects of certain environmental-conservation linked trade measures at the Committee on Trade and Environment (CTE). This response has targeted trade related measures involving four areas including “carbon border measures; environment-based management of minimum residue limits (MRLs) in agriculture; deforestation-related measures; and import restrictions based on the green content of commodities.” [lxx] Additionally, the People’s Republic of China has submitted a proposal at the CTE for ‘dedicated multilateral discussions on the trade aspects and implications of certain environmental measures.’ [lxxi] The proposal targets discussions on 6 areas which include inter-alia the potential impacts and the legality of the trade related aspects of certain environmental measures. (The elephant in the room, within this proposal, seems to be measures like CBAM).
Finally, it deserves mentioning that, during the UNFCCC COP-26 developing countries were assured of an increase in climate finance via a ‘New Collective Quantified Goal on climate finance’ or NCQG.[lxxii] Hence, by 2025 the $100 billion per annum climate finance commitment by the developed world will have to be augmented “taking into account the needs and priorities of developing countries.” [lxxiii] The CBAM’s tariff linked effects are currently slated to kick into effect by 2026. If CBAM requires greater efforts by developing states to decarbonise their exports, the NCQG, along with a range of other past commitments towards climate justice, demands fulfilment by developed states too. As they say, it takes two to tango.
*Other than the NCQG there are other commitments by developed states regarding Loss and Damage provisions, enhanced support for capacity-building interventions and technology transfers.[lxxiv]
**All views expressed above are personal.
*** A particularly strong ideological critique of the imposition of climate action rules by developed countries was made by the Bolivian President Luis Alberto Arce at the COP 26 summit. Arce criticized the imposition of aggressive climate action commitments by developed states upon developing countries. He referred to such impositions as means for pushing 'Green Capitalism' (emerging green energy MNCs) and carbon markets as part of a 'new carbon colonialism'. Beyond their rhetorical or ideological value, such statements reflect a sense of frustration in the developing world. Developing states which were responsible for only a fraction of historical submissions are being forced to work with a rapidly decreasing carbon budget.
A statement by India's then permanent representative to the UN, Ambassador T.S. Tirumurti issued on behalf of a cross-regional group of 10 developing countries should be seen in this context-
"We, therefore, call on developed countries to do a Net-Negative in 2050 in order to vacate the carbon space in 2050 for developing countries to grow till they too reach Net-Zero. We call on them to do a Net-Zero much earlier than 2050, so that the world does not, in effect, move farther away from achieving the Paris targets."
Developing countries are obliged to maximise their emissions reduction efforts as they face immense climate change associated risks. India's climate action record reflects this compulsion to act. However, this does not change the manifestly disproportionate degree of climate action efforts being demanded of them, despite their role in the climate crises being a minor one in contrast to the past two centuries of emissions by the developed states.
Bolivian President's Comments- https://www.commondreams.org/news/2021/11/02/bolivian-president-warns-carbon-colonialism-wont-solve-climate-crisis
Cross-Regional Statement by India's PR to the UN-
https://pminewyork.gov.in/others?id=NDYzNA,,
By Hamid Naved- (ITS 2022)
Additional References-
1. While writing this piece I frequently came across writings by Ajay Srivastava (Founder, Global Trade Research Initiative), R.V. Anuradha (Partner, Clarus Law Associates) and Mr. Abhijit Das (Former Head, Centre for WTO Studies) on the various issues relating to the CBAM (including the articles mentioned below). Those interested in this domain would be well advised to go through their works as well.
a. (Report by the Global Trade Research Initiative providing a commodity and HS code specific analysis of CBAM's effects in great detail.)
3. https://www.thehindubusinessline.com/opinion/7-ways-to-ease-impact-of-carbon-border-tax/article66770651.ece (Provides a 7 point action plan for the Indian government in responding to the imposition of the CBAM).
a. (Lists Additional potential options for India’s response to the CBAM’s implementation: Including a suggestion for an Indian carbon import measure based on Per-Capita Emissions given by Abhijit Das)
5. https://egrove.olemiss.edu/cgi/viewcontent.cgi?article=3717&context=hon_thesis (Contains a comprehensive compilation of WTO DSB decisions relevant to CBAM)
7. https://op.europa.eu/webpub/eca/special-reports/emissions-trading-system-18-2020/en
[i] S. Jaishankar, The India Way: Strategies for an Uncertain World 21 (2020) (e-book)
[ii] Swati Verma & Nina Chestney, Global carbon markets value hit record $909 bln last year, REUTERS (February 7, 2023 6:20 PM), https://www.reuters.com/business/sustainable-business/global-carbon-markets-value-hit-record-909-bln-last-year-2023-02-07/.
[iii] EU carbon border adjustment mechanism
Implications for climate and competitiveness, EUROPEAN PARLIAMENT, https://www.europarl.europa.eu/RegData/etudes/BRIE/2022/698889/EPRS_BRI(2022)698889_EN.pdf.
[iv] Understanding Global Warming Potentials, USEPA, https://www.epa.gov/ghgemissions/understanding-global-warming-potentials.
[v] EU economy greenhouse gas emissions in Q3 2022, EUROSTAT (Feb. 14, 2023), https://ec.europa.eu/eurostat/web/products-eurostat-news/w/DDN-20230215-1#.
[vi] Carbon leakage, DG CLIMA, https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/free-allocation/carbon-leakage_en.
[vii] Ankai et al., Trade and climate change information brief no. 4: The carbon content of international trade, WTO, (November 9, 2021) https://www.wto.org/english/news_e/news21_e/clim_03nov21-4_e.pdf.
[viii] Markowitz et al., European Parliament Approves CBAM, ETS Revision and Deforestation Rules, AKIN GUMP (April 19, 2023), https://www.akingump.com/en/insights/blogs/speaking-sustainability/european-parliament-approves-cbam-ets-revision-and-deforestation-rules.
[ix] Merijn Betjes, Update Carbon Border Adjustment Mechanism (CBAM): Provisional agreement reached, MEIJBURG (December 14, 2022), https://meijburg.com/news/update-carbon-border-adjustment-mechanism-cbam-provisional-agreement-reached.
[x] Carbon Border Adjustment Mechanism, DIRECTORATE-GENERAL FOR TAXATION AND CUSTOMS UNION, https://taxation-customs.ec.europa.eu/green-taxation-0/carbon-border-adjustment-mechanism_en.
[xi] European Parliament, Supra Note 3.
[xii] Isabelle et al., A European Union Carbon Border Adjustment Mechanism: Implications for developing countries, UNCTAD (July 14 2021), https://unctad.org/system/files/official-document/osginf2021d2_en.pdf.
[xiii] Press Trust of India, India used far less than its share of global carbon budget, emissions can grow: Govt, BUSINESS STANDARD (July 30, 2022), https://www.business-standard.com/article/current-affairs/india-used-far-less-than-its-share-of-global-carbon-budget-govt-122073000135_1.html.
[xiv] Isabelle et al., Supra Note 12.
[xv] Sam Lowe, The EU’s carbon border adjustment mechanism How to make it work for developing countries, CENTRE FOR EUROPEAN REFORM (April 2021), https://www.cer.eu/sites/default/files/pbrief_cbam_sl_21.4.21.pdf.
[xvi] Christian Becker, Donald Brown, Introduction to the Special Section: Integrating Development Ethics and Climate Change Ethics, 16:1 ETHICS, POLICY & ENVIRONMENT 37, (2013).
[xvii] Aylor et al., How an EU Carbon Border Tax Could Jolt World Trade, BCG (June 30, 2020), https://www.bcg.com/publications/2020/how-an-eu-carbon-border-tax-could-jolt-world-trade
[xviii] EU should consider trade impacts of new climate change mechanism, UNCTAD (14 July, 2021), https://unctad.org/news/eu-should-consider-trade-impacts-new-climate-change-mechanism.
[xix] Ibid.
[xx] Eklavya Gupte & Daniel Lalor, Weak compliance demand drags EU carbon prices to three-month low, S&P GLOBAL (April 23, 2023 10:19), https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/electric-power/042823-weak-compliance-demand-drags-eu-carbon-prices-to-three-month-low#.
[xxi] Decision -/CP.27 Sharm el-Sheikh Implementation Plan, UNFCCC, https://unfccc.int/sites/default/files/resource/cop27_auv_2_cover%20decision.pdf.
[xxii] European Union: European Parliament, European Parliament resolution of 10 March 2021 towards a WTO-compatible EU carbon border adjustment mechanism, P9_TA(2021)0071, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021IP0071 https://www.europarl.europa.eu/doceo/document/TA-9-2021-0071_EN.pdf.
[xxiii] WTO Bodies involved in the dispute settlement process, WTO, https://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c3s1p1_e.htm
[xxiv] China—Measures Affecting Imports of Automobile Parts,” Report of the Appellate Body, World Trade
Organization, WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R, December 15, 2008, paras. 158, 161.
[xxv] Article I, GATT 1994:General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 U.N.T.S. 187, 33 I.L.M. 1153 (1994) [hereinafter GATT 1994].
[xxvi] GATT Article XXIV.
[xxvii] GATT Article II.
[xxviii] Ajay Srivastava, The Carbon Border Adjustment Mechanism EU’s Climate Trojan Horse to Obstruct Imports, Global Trade Research Initiative (March 2023), http://gtri-in.com/gtriRep6.pdf.
[xxix] Appellate Body Report, European Communities—Measures Affecting Asbestos and Asbestos-Containing Products, para. 99, WTO Doc. WT/DS135/AB/R (adopted Apr. 5, 2001)
[xxx] James Bachhus, Legal Issues with the European Carbon Border Adjustment Mechanism, CATO INSTITUTE (August 9, 2021), https://www.cato.org/briefing-paper/legal-issues-european-carbon-border-adjustment-mechanism.
[xxxi] Agreement on Subsidies and Countervailing Measures (15 April 1994) LT/UR/A-1A/9.
[xxxii] GATT, Art. XX.
[xxxiii] WTO Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline (20 May 1996) WT/DS2/AB/R para 1152.
[xxxiv] WTO Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products (15 June 2001) WT/DS58/AB/R (“US – Shrimp”).
[xxxv] Black et al., More Countries Are Pricing Carbon, but Emissions Are Still Too Cheap, IMF (July 21, 2022), https://www.imf.org/en/Blogs/Articles/2022/07/21/blog-more-countries-are-pricing-carbon-but-emissions-are-still-too-cheap.
[xxxvi] WTO Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded Tyres (17 December 2007) WT/DS332/AB/R.
[xxxvii] WTO Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products (15 June 2001) WT/DS58/AB/R (“US – Shrimp”).
[xxxviii] Shantanu Nandan Sharma, India views EU’s proposal on carbon tariff a protectionist tool, weighs options to counter it, THE ECONOMIC TIMES (Apr 23, 2023, 07:53 AM IST), https://economictimes.indiatimes.com/industry/renewables/india-views-eus-proposal-on-carbon-tariff-a-protectionist-tool-weighsoptions-to-counter-it/articleshow/99697057.cms.
[xxxix] Ibid.
[xl] Analysis | India cheers the return of 'King Coal' as industry sees buoyant future, THE HINDU (March 1, 2023), https://www.thehindu.com/business/Industry/analysis-india-cheers-the-return-of-king-coal-as-industry-sees-buoyant-future/article66566682.ece.
[xli] Zeke Hausfather, Analysis: What the new IPCC report says about when world may pass 1.5C and 2C, CARBONBRIEF (August 8, 2021), https://www.carbonbrief.org/analysis-what-the-new-ipcc-report-says-about-when-world-may-pass-1-5c-and-2c/.
[xlii] Trends Desk, Greta Thunberg’s reply to a Republican’s argument against climate action goes viral, THE INDIAN EXPRESS (September 24, 2019 14:26), https://indianexpress.com/article/trending/trending-globally/greta-thunbergs-reply-to-republican-garret-grave-6015920/.
[xliii] Ministry of Power, India jumps 2 spots higher, and now ranks 8th as per Climate Change Performance Index, PIB (CCPI, 2023), (November 2022, 5:08 PM), https://www.pib.gov.in/PressReleasePage.aspx?PRID=1878023#:~:text=India%20improves%202%20ranks%20in,climate%20change%20policies%20and%20actions.&text=India%20has%20been%20ranked%20amongst,on%20its%20Climate%20Change%20performance.
[xliv]Statement by the OECD Secretary-General on climate finance trends to 2020, OECD (July 29, 2022), https://www.oecd.org/environment/statement-by-the-oecd-secretary-general-on-climate-finance-trends-to-2020.htm.
[xlv] UNFCCC Standing Committee on Finance Fifth Biennial Assessment and Overview of Climate Finance Flows, UNFCCC, https://unfccc.int/sites/default/files/resource/J0156_UNFCCC%20BA5_2022_Report_v4%5B52%5D.pdf.
[xlvi] Article 3, United Nations Framework Convention on Climate Change, May 9, 1992, S. Treaty Doc No. 102-38, 1771 U.N.T.S. 107.
[xlvii] PTI, India's per capita GHG emissions far below world average: UNEP report, Business Standard (October 27, 2022, 5:48 PM), https://www.business-standard.com/article/current-affairs/india-s-per-capita-ghg-emissions-far-below-world-average-unep-report-122102700824_1.html.
[xlviii] Vienna Convention on the Law of Treaties (adopted 23 May 1969, entered into force 27 January 1980) 1155 UNTS 331 (VCLT) art 31(3)(c).
[xlix] Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, available at https://www.wto.org/english/docs_e/legal_e/enabling1979_e.htm.
[l] GATT, Art. XXXVI.
[li] European Union: European Parliament, European Parliament resolution of 10 March 2021 towards a WTO-compatible EU carbon border adjustment mechanism, P9_TA(2021)0071, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021IP0071 https://www.europarl.europa.eu/doceo/document/TA-9-2021-0071_EN.pdf.
[lii] A COMMITMENT TO SUPPORT VIETNAM IN ITS ENERGY TRANSITION, UNOPS (December 16 2022), https://www.unops.org/news-and-stories/news/a-commitment-to-support-vietnam-in-its-energy-transition.
[liii] Isabelle et al., Supra Note 12.
[liv] Parry, Ian, Simon Black, and James Roaf. 2021. “Proposal for an International
Carbon Price Floor among Large Emitters.” IMF Staff Climate Notes 2021/001, International Monetary Fund,
Washington, DC, available at https://www.imf.org/en/Publications/staff-climate-notes/Issues/2021/06/15/Proposal-for-an-International-Carbon-Price-Floor-Among-Large-Emitters-460468.
[lv] Ibid.
[lvi] Energy Conservation (Amendment) Act, 2022.
[lvii] The Energy Conservation Act, 2001, §13(td).
[lviii] The Energy Conservation Act, 2001, §2(db).
[lix] The Energy Conservation Act, 2001, §14AA.
[lx] Forwarding of draft Carbon Credit Trading Scheme (CCTS)- Request for furnishing comments thereon-reg , POWERLINE (March 27 2023), https://powerline.net.in/wp-content/uploads/2023/03/Mail-dated-27-03-2023-to-Industry-Association-reg-CCTS.pdf.
[lxi] Swati Verma & Nina Chestney, Global carbon markets value hit record $909 bln last year, REUTERS (February 7, 2023 6:20 PM), https://www.reuters.com/business/sustainable-business/global-carbon-markets-value-hit-record-909-bln-last-year-2023-02-07/.
[lxii] Cabinet approves National Green Hydrogen Mission, PIB (Jan. 4, 2023, 4:14PM), https://pib.gov.in/PressReleasePage.aspx?PRID=1888547.
[lxiii] Vasudevan Mukunth, Cracked: A mystery that could allow hydrogen to massively greenify steelmaking, THE HINDU (April 27, 2023 10:30 am), https://www.thehindu.com/sci-tech/science/hydrogen-direct-reduction-water-pore-formation-mystery/article66781330.ece.
[lxiv] India-EU Broad Based Trade and Investment Agreement (BTIA) negotiations, https://commerce.gov.in/international-trade-trade-agreements-indias-current-engagements-in-rtas/india-eu-broad-based-trade-and-investment-agreement-btia-negotiations.
[lxv] Rakesh Mohan Joshi, India-EU trade deal will pave way for huge opportunities, THEHINDUBUSINESSLINE (April 12, 2023 09:23 PM), https://www.thehindubusinessline.com/opinion/india-eu-trade-deal-will-pave-way-for-huge-opportunities/article66730225.ece.
[lxvi] Ravi Dutta Mishra, Carbon tax hurdle looms over India-UK FTA talks, LIVEMINT (April 6, 2023 11:59 AM IST), https://www.livemint.com/economy/carbon-tax-hurdle-looms-over-india-uk-fta-talks-11680633139258.html.
[lxvii] MC 12 Outcome Document, Adopted on 17 June 2022, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filenamfe=q:/WT/MIN22/24.pdf&Open=True
[lxviii] Ibid.
[lxix] Supra Note 54.
[lxx] Environment committee draws members’ broad engagement, considers proposals to enhance work, WTO (March 15, 2023), https://www.wto.org/english/news_e/news23_e/envir_15mar23_e.htm.
[lxxi] A PROPOSAL FOR DEDICATED MULTILATERAL DISCUSSIONS ON THE TRADE ASPECTS
AND IMPLICATIONS OF CERTAIN ENVIRONMENTAL MEASURES, WTO (March 13 2023), https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/CTE/W251.pdf&Open=True
[lxxii] New Collective Quantified Goal on Climate Finance, UNFCCC, https://unfccc.int/NCQG#:~:text=53%2C%20Parties%20decided%20that%2C%20prior,and%20priorities%20of%20developing%20countries.
[lxxiii] COP26 Outcomes: Finance for Climate Adaptation, UNFCCC, https://unfccc.int/process-and-meetings/the-paris-agreement/the-glasgow-climate-pact/cop26-outcomes-finance-for-climate-adaptation.
[lxxiv] Paragraph 36, S Decision -/CP.27 Sharm el-Sheikh Implementation Plan, UNFCCC, https://unfccc.int/sites/default/files/resource/cop27_auv_2_cover%20decision.pdf.
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Founder, Global Trade Research Initiative
2yVery well developed...congratulations dear Hamid...