Mint Primer: Why EU’s carbon tax is facing pushback

Which EU nations are against CBAM?

Poland and Germany are two countries that appear concerned. Poland is the most dependent on fossil fuel for its energy security in Europe, producing around 70% of its power from coal. In August, Poland challenged the legal basis for CBAM at the Court of Justice of the European Union. The Polish government opposed the law on the grounds that it imposes a cost of energy transition on those who are “less well-off". Poland would receive the biggest share of the €17.5 billion EU transition fund but still feels that CBAM could widen social inequality and job losses. Similar concerns have been flagged by the developing world.

Why is Germany concerned?

A recent report in Financial Times said CBAM could face risks after Germany, the EU’s largest economy, sought exemptions for its micro, small and medium enterprises (MSMEs). According to the World Trade Organization (WTO), imported and locally produced goods should be treated equally. Granting exemptions to German MSMEs could force the EU to extend similar sops to MSMEs in developing countries such as India and China, rendering CBAM less effective. The majority of firms in the big export markets of the EU are small. India has also requested the bloc to make easy norms for its MSMEs.

Does WTO have a view on the matter?

WTO says environmental measures such as CBAM would result in a 20-35% tax on some imports into the EU. This is a key concern also flagged by other member countries. India, China and others have moved papers saying it’s discriminatory and penalizes developing countries more even though rich nations are historically responsible for higher carbon emissions.

How has Indian industry responded?

The actual levy comes into effect from 2026. But exporting countries are required to share emission data starting 1 October 2023. The Indian industry has flagged concerns around the complexity of the process. And CBAM has norms to fine non-submission or incorrect or incomplete submission of data. The penalty is as much as €10 to €50 per tonne of unreported emission. It goes further up when more than two incomplete or incorrect reports are submitted in a row. This is taxed at the marginal rate of tax.

What is India’s strategy on the tax?

India is using a multi-pronged strategy to try and mitigate the impact of CBAM on its slowing manufacturing sector. At WTO, it has opposed CBAM along with other developing nations. India is also drafting its own norms so that the taxes payable on India’s carbon emission stay within its borders. India has begun working on a domestic carbon tax along the lines of the EU to tax imports from developed countries and charge them for their historical emissions. Meanwhile, discussions between the EU and India are ongoing.