Context: At the two-day G-20 ministerial meeting on environment and climate change in Italy, developing countries, including India, are expected to raise their concerns over the European Union’s recent proposal on the first of its kind carbon border tax.Under this proposal, the 27 EU nations will impose border tax on imports of carbon-intensive goods.Yet to be legally formalised, the tax plan could come into force from 2026.On similar lines, Democratic lawmakers, earlier this week, introduced a legislation establishing a carbon tariff on certain imports like steel as a means to fight climate change.So what exactly is a carbon border tax? Why do developed countries want to impose such a tariff and why are developing nations opposed to the idea?

What is carbon border tax?

• In theory, a carbon border tax could help prevent that undercutting. If factories all over the world that wanted to sell steel, cement, aluminum or fertilizer to the EU had to pay a surcharge for the pollution they emit, they would have incentive to clean up their act too. 
• Companies within Europe would have less incentive to shift operations overseas. And, if other countries adopted similar rules, that could put pressure on nations that are reluctant to curb their use of fossil fuels.

What is the EU’s proposal?

• Earlier, the EU Parliament had adopted a resolution to implement a 'Carbon Border Adjusted Mechanism' (CBAM).
• To begin with, by 2023, the CBAM would cover energy-intensive sectors.
• These may include cement, steel, aluminium, oil refinery, paper, glass, chemicals as well as the power sector.
• A recent draft regulation pertaining to the CBAM proposed that goods entering the EU would be taxed at the borders.
• Such a tax would promote "low-carbon, resource-efficient manufacturing."
• The UK and the US are also considering such proposals.

What is the rationale?

Two keys reasons for the carbon tax proposal are EU’s environmental goals and its industries' global competitiveness.

• Recently, the EU declared it would cut its carbon emissions by at least 55% by 2030 compared to 1990 levels.
• EU's greenhouse gas emissions have fallen by 24% compared to 1990 levels.
• But emissions associated with imports are increasing.
• These contribute 20% of the EU's carbon dioxide emissions.
• So, a carbon tax would incentivise other countries to reduce GHG emissions.
• This can further shrink the EU's carbon footprint.

Secondly, the 27 EU member states have much stricter laws to control GHG emissions.

• It has an 'Emissions Trading System' that caps how much GHG individual industrial units can emit.
• This makes operating within the EU expensive for certain businesses.
• So, the EU authorities fear that these firms might prefer to relocate to countries that have more relaxed or no emission limits.
• This is known as 'carbon leakage' and it increases the total emissions in the world.

Who all have opposed it?

• The BASIC (Brazil, South Africa, India, and China) countries' grouping had opposed the EU's proposal, terming it "discriminatory."
• It is said to be against the principles of equity and 'common but differentiated responsibilities and respective capabilities' (CBDR-RC).
• These principles acknowledge that richer countries have a responsibility of providing financial and technological assistance to developing and vulnerable countries to fight climate change.
• Developing nations feel that the developed nations have failed to fulfil the Green Climate Fund commitments.
• Under this, developing nations were to receive $100 billion for green development by 2020. This has now been delayed to 2025.

How does this impact India?

• A carbon tax would increase the prices of Indian-made goods in the EU.
• That would make Indian goods less attractive for buyers and shrink the demand.
• This would create serious near-term challenges for companies with a large greenhouse gas footprint.
• It would get to be a new source of disruption to a global trading system.
• Notably, EU is India's third largest trading partner.
• It accounted for $74.5 billion worth of trade in goods in 2020, or 11.1% of India's total global trade.
• India's exports to the EU were worth $41.36 billion in 2020-21.

What are the larger implications?

• The carbon tax mechanism may spur adoption of cleaner technologies.
• But without adequate assistance for newer technologies and finance, it would amount to levying taxes on developing countries.
• It is currently unclear how the EU would assess emissions of an imported product.
• There are many small businesses that will face difficulty in quantifying their emissions.
• And the additional costs will be passed on to the consumers, eventually.
• Also, possibly, the tax could discourage sectors and industries that are already adopting cleaner technologies.
• In that case, it becomes another procedural and compliance hassle, and prove to be counterproductive.

Road Ahead

• There is still a great deal of debate among experts over how effective the EU’s carbon border adjustment will ultimately be but officials saw the policy as vital for addressing fears that the EU’s climate policies could place the continent at an economic disadvantage.
• “It sends a real signal that the EU is serious about trying to decarbonize these industrial sectors and they’re trying to find an answer to a lot of those domestic political concerns.”