Developing Countries Are Being Asked To Fund EU’s Decarbonisation Efforts

As part of its ambitious Green Deal 2050, the European Union has proposed the implementation of a Carbon Border Adjustment Mechanism for certain products (including steel and aluminium). The CBAM is one of several legislative measures designed to reduce net greenhouse gas emissions by the EU. CBAM would apply carbon emission costs on imported products equivalent to those borne under the EU system.

While CBAM is clearly against the principle of "common but differentiated responsibilities" under the United Nations Framework Convention on Climate Change, EU seems to be conveying that CBDR is all bark and no bite i.e. the enforceability of CBDR as a legal rule remains a question mark.

While there are many logical and legal arguments for and against CBAM, the article would focus on a singular aspect of CBAM–the absurd end result that developing countries would be indirectly funding the decarbonisation efforts in the EU through CBAM.

The EU has been explicit that the funds collected through CBAM would be part of the general budget and the utilisation of the budget will be at the discretion of the EU.

CBAM Regulation contains general statements that the EU would provide financial support to LDCs in their effort towards decarbonisation and that the EU is committed to supporting low and middle-income third countries towards the decarbonisation of their manufacturing industries.

Whether the EU would simply adjust its existing commitments against the funds collected through CBAM or would utilise the funds by making fresh commitments for decarbonisation in developing and least-developed countries is anybody’s guess. However, it is clear that countries such as India would be indirectly contributing towards decarbonisation in the EU.

It is crucial for India to resist such absurdity and pretence by the EU. India may not rely solely on the international trade dispute settlement due to the time it takes for achieving the desired result and the current deadlock in the WTO dispute settlement.

During this period, India could introduce a transitional “Carbon Price Adjustment for Exports to the EU” (CPAE or price adjustment). The price adjustment would only be applicable for export to the EU or other countries which introduce CBAM-type mechanisms. For the purposes of such price adjustment, India could accept all declarations that the exporter intends to file with the EU and the verification report which are required under CBAM. This would minimise the transaction costs for the exporters.

The price adjustment would most likely result in non-levy under CBAM because the CBAM Regulations state that an exporter can claim a reduction to take into account the carbon price paid in the country of origin for the declared embedded emissions. The price adjustment could be further reduced to the extent of the price to be paid by the exporter under the carbon trading scheme being introduced by India or other carbon-related taxes in India. 

The funds collected through price adjustment could be utilised to provide horizontal sector-specific incentives to aid decarbonisation within India. The exporter would remain revenue neutral because the CPAE or price adjustment would be identical to the levy under CBAM.

In other words, the competitiveness for exports would not be worse off than it would be after the introduction of CBAM. Further, the exclusion of domestic sales or imports from such levy would mitigate the potential adverse effects on competitiveness with the Indian market and exports to countries which do not have CBAM-type mechanisms as well as preserve the policy choices available to India for its domestic market.

The funds collected through CPAE cannot be utilised to grant transaction-specific incentives or rebates to the exporters because of the restrictions contained within the CBAM Regulations. Further, the price adjustment should be identical to the effective levy under CBAM for multiple legal reasons as explained below. 

The General Agreement on Tariffs and Trade applies to export duties and charges and requires India to provide all WTO Members with the same advantage, favour, privilege or immunity it provides to any WTO Member.

The requirements have been interpreted to mean equality of competitive opportunities for all WTO Members. The price adjustment imposed by India post introduction of CBAM does not alter competitive opportunities between the EU and other WTO members. In other words, the CPAE or price adjustment would be valid so long as CBAM remains in place and the price adjustment is identical to the effective levy under CBAM. 

From the standpoint of the Indian Constitution, the legislature has the authority to enact laws based on reasonable classification, as long as they are:

• Based on an intelligible differentia.

• The differentia adopted has a reasonable nexus with the object sought to be achieved.

The legislature is typically given wide latitude in matters related to taxation. The price adjustment linked to CBAM is based on an intelligible differentia, between goods exported to the EU and those exported to other countries. The differentiation has a reasonable nexus with the object sought to be achieved–the preservation of revenue to aid India’s decarbonisation efforts.

The proposed solution does not seek to address all the logical and legal criticism of CBAM. It could be adopted as part of the multi-pronged strategy to resist CBAM through a broad coalition of the global south, at every fora and using all the legal remedies available to India.

If the EU genuinely seeks to address carbon leakage, it may not object to India introducing such a price adjustment. However, if the EU’s objective was always about collecting money to fund its decarbonisation, such pretences would come out in the open after the introduction of price adjustment by India and would aid India's effort as the voice of the global south.

Atul Sharma is a partner at Sarvada Legal. He specialises in the areas of WTO laws, trade policy, export controls, and has successfully acted as a co-counsel for governments in cases at the WTO.

Sahil Verma, advocate at the firm, also contributed to this piece.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.