Why in the News?

Finance Minister Nirmala Sitharaman called out the European Union’s initiatives such as the Carbon Border Adjustment Mechanism (CBAM) and Deforestation Rules as ‘unilateral’ and ‘arbitrary’ measures.

What’s in Today’s Article?

• About CBAM (Meaning, Features, Objective, Scope, Working, etc.)
• About Deforestation Rules of EU (Reasons for it being Discriminatory)
• News Summary

Carbon Border Adjustment Mechanism:

• The Carbon Border Adjustment Mechanism (CBAM) is a policy initiative by the European Union (EU) aimed at reducing carbon emissions by imposing a carbon price on imports from countries with less stringent climate policies.
• It ensures that imported products face the same carbon costs as those produced within the EU, promoting fair competition and encouraging global decarbonization efforts.
• Key Features of CBAM:
  • Objective:
    • CBAM aims to prevent carbon leakage, where companies shift production to countries with looser carbon regulations to avoid stricter EU climate policies.
    • It aligns with the EU’s climate goals, particularly its European Green Deal, targeting net-zero emissions by 2050.
  • Scope:
    • Initially, CBAM covers sectors with high carbon emissions, including cement, steel, aluminium, fertilizers, electricity, and hydrogen.
    • The mechanism calculates the embedded carbon emissions in imported products and imposes an equivalent carbon price.
  • Implementation Timeline:
    • 2023-2025: Transition phase where importers report the carbon emissions of their goods without paying the adjustment.
    • 2026 onwards: Full implementation where importers will be required to purchase CBAM certificates corresponding to the embedded carbon emissions of their imports.
• Working Mechanism of CBAM:
  • CBAM Certificates:
    • Importers must buy CBAM certificates to cover the carbon emissions of their imported goods, matching the EU’s Emissions Trading System (ETS) price.
    • The price of CBAM certificates will reflect the EU’s internal carbon price, ensuring a level playing field for domestic and foreign producers.
  • Calculation of Carbon Emissions:
    • The carbon footprint of imported goods is calculated based on direct emissions during their production.
    • If a country already imposes a carbon price, this can be deducted from the CBAM obligation, avoiding double taxation.

Why Developing Countries Like India Find EU’s Deforestation Rules Discriminatory?

• The European Union's Deforestation Rules, aimed at preventing the import of commodities linked to deforestation, have faced criticism from many developing countries.
• These countries argue that the rules are discriminatory for several reasons, which largely revolve around issues of fairness, trade barriers, and the economic burden of compliance.
• Increased Compliance Costs:
  • The EU rules require exporters to provide geolocation data and prove that commodities like soy, palm oil, coffee, and cocoa are not sourced from recently deforested areas.
  • Small-scale farmers and producers in developing countries often lack the resources, technology, and expertise to meet these stringent requirements, making compliance costly and administratively burdensome.
  • These additional costs can make exports from developing countries less competitive in the EU market.
• Disadvantage to Agricultural Exports:
  • Many developing countries are export-dependent on agricultural commodities that the EU has identified as high-risk for deforestation, such as palm oil from Indonesia and Malaysia or coffee and cocoa from African and Latin American nations.
  • The rules can act as a non-tariff barrier, potentially reducing market access for these countries in the EU.
• Limited Recognition of National Efforts:
  • Many developing countries feel that the EU's rules do not sufficiently recognize their national efforts to combat deforestation and implement sustainable land-use practices.
  • Countries like India, Brazil, Indonesia, and Ghana have pointed out that they have domestic policies and reforestation efforts in place, yet the EU’s rules impose a one-size-fits-all standard that may not account for these efforts.
  • This perceived lack of acknowledgment undermines the sovereignty of these countries in managing their own resources.
• Unequal Responsibility for Climate Change:
  • Developing countries argue that the EU’s deforestation rules place disproportionate responsibility on them for addressing global environmental issues like deforestation and climate change.
  • Historically, developed nations have contributed more to global carbon emissions and deforestation through industrialization. Yet, developing countries, which often rely on agriculture for economic growth, are being pressured to adhere to stringent standards that may hinder their development.
  • They view this as a form of environmental double standards.

News Summary:

• Finance Minister criticized the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) and new deforestation rules, describing them as “unilateral” and “arbitrary” measures that could harm countries like India.
• According to her, these measures could negatively impact economic growth and hinder green energy transition goals in developing nations.
• She labelled the CBAM as a trade barrier, suggesting that it creates additional challenges for countries working towards their net-zero commitments.
• More such measures from developed countries could pose unforeseeable risks to nations like India, which are striving to address climate change while maintaining economic growth.