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(Relevance: In 2023, UPSC asked questions on the ‘carbon tax’. It has been a sticking point in major trade deals that India is trying to finalise. In this context, it becomes important to understand this topic from both Prelims and Mains perspectives thoroughly.)
Why in the news?
India and the United Kingdom inked a Free Trade Agreement (FTA) on Tuesday (May 6), bringing to an end around three years of negotiations. One of the major sticking points in finalising the trade deal was the carbon tax of the United Kingdom. The draft UK Carbon Border Adjustment Mechanism (CBAM) legislation states that the levy will apply to imported goods from January 1, 2027, and defines CBAM goods as aluminium, cement, fertilisers, hydrogen, iron, and steel — sectors associated with high carbon emissions.
As the UK remains unwilling to grant any concessions under its CBAM, India has suggested a “rebalancing mechanism” which would require the UK to compensate Indian industry for losses incurred due to the regulation.
Key Takeaways:
1. “The ‘rebalancing mechanism’ article has been inserted into the ‘general exceptions’ chapter of the negotiating text between the two countries. This would enable India to claim compensation for its losses and ensure the UK does not raise a dispute against India at the World Trade Organisation (WTO),” a government official, speaking on the condition of anonymity, told The Indian Express.
2. The general exceptions chapter in international trade agreements, such as the General Agreement on Tariffs and Trade (GATT), allows countries to implement measures that might “otherwise violate trade rules”, provided they are justified on grounds such as public health or environmental protection, according to the WTO.
Carbon Tax – Carbon Border Adjustment Mechanism (CBAM)
3. According to the World Bank, “a carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or – more commonly – on the carbon content of fossil fuels”. It is a type of carbon pricing, and the other type of carbon pricing is the emissions trading systems (ETS). The CBAM is a form of carbon pricing system.
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4. The CBAM or Carbon Tax was first introduced by the European Union in 2021. It taxes certain products coming in from other countries based on their carbon emissions footprint in their production process. For instance, if the imported steel was produced through a process that entailed higher emissions than the emissions standards for that product in Europe, it would be taxed.
5. CBAM allows industries in Europe to remain competitive while continuing to maintain high environmental standards. It prevents these industries from relocating their production to countries where the production might be cheap owing to less strict emission norms, a situation described as carbon leakage. In the process, it hopes to contribute to reducing global emissions.
5. However, it hurts the export competitiveness of developing countries such as China and India. The developing countries point out that CBAM overlooks the “differentiation” embedded in the global climate architecture that allows them to be treated differently from the developed nations.
6. Notably, CBAM is set to take effect in January 2026, with the transition period requiring exporters to submit data to EU authorities, having begun on October 1, 2023. This is significant as India exports over 15 per cent of its total goods exports to the EU. In 2022-23, India exported goods worth $75 billion to the EU.
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7. Finance Minister Nirmala Sitharaman and Commerce and Industry Minister Piyush Goyal have, on multiple occasions, called the Carbon Border Adjustment Mechanism (CBAM) or carbon tax an “unfair” measure and a violation of the “common but differentiated responsibilities” (CBDR) provision of multilateral climate negotiations.
| Common But Differentiated Responsibilities (CBDR) |
| This principle, established in UNFCCC, recognises the fact that while all countries share a responsibility to address climate change, their obligations differ according to their capacities and circumstances. |
BEYOND THE NUGGET: India’s Carbon Credit Trading Scheme (CCTS)
1. The draft UK-CBAM legislation also outlines how emissions will be calculated and how the CBAM rate will be set, based on a domestic sectoral price linked to the UK Emissions Trading Scheme. In India, the Carbon Credit Trading Scheme (CCTS) is enacted to suit the a developing nation’s model as against the system in Western countries that deals with absolute emissions.
2. The CCTS, launched in 2023, is to create a framework for the trading of carbon credits, to facilitate the reduction of emissions in energy-intensive industries, and to support India’s climate commitments under the Paris Climate Agreement of 2015.
3. This scheme is not operational yet and for that for that the the Ministry of Environment, Forest and Climate Change has notified a Draft Greenhouse Gases Emissions Intensity (GEI) Target Rules, 2025, on April 16, to put in place a compliance mechanism for the Carbon Credit Trading Scheme, 2023 (CCTS).
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4. In December last year, the Ministry of Environment, Forest and Climate Change, in response to a Parliament question, provided that CCTS follows two mechanisms: a compliance mechanism and an offset mechanism. “In the compliance mechanism, the obligated entities that comply with the prescribed GHG emission intensity reduction shall be eligible for issuance of Carbon Credit Certificates. In the offset mechanism, the non-obligated entities can register their projects for GHG emission reduction or removal, or avoidance for issuance of Carbon Credit Certificates.”
Post read question
Consider the following statements: (UPSC CSE 2023)
Statement-I: Carbon markets are likely to be one of the most widespread tools in the fight against climate change.
Statement-II: Carbon markets transfer resources from the private sector to the State.
Which one of the following is correct in respect of the above statements?
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(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
(c) Statement-I is correct but Statement-II is incorrect
(d) Statement-I is incorrect but Statement-II is correct
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