India to lose 0.05% of GDP due to CBAM, should impose 'historical polluter tax' on EU: Report

New Delhi: The European Union's Carbon Border Adjustment Mechanism (CBAM) will impose an additional 25 per cent tax on carbon-intensive goods exported from India to the EU, a new report said on Wednesday and recommended a counter-tax on rich countries historically responsible for climate change.

CBAM is the EU's proposed tax on energy-intensive products, such as iron, steel, cement, fertilizers and aluminium imported from countries like India and China.

This tax burden would represent 0.05 per cent of India's GDP, according to the report titled "The Global South's response to a changing trade regime in the era of climate change" by an independent think tank -- Centre for Science and Environment (CSE).

These findings are based on data from the past three years (2021-22, 2022-23, and 2023-24).

The tax is based on the carbon emissions generated during the production of these goods.

The EU argues that this mechanism creates a level playing field for domestically manufactured goods, which must adhere to stricter environmental standards, and helps reduce emissions from imports.

But other nations, particularly developing countries, are worried this would harm their economies and make it too expensive to trade with the bloc.

The move has also sparked debate at multilateral forums, including UN climate conferences, with developing countries arguing that under UN climate change rules countries cannot dictate how others should reduce emissions.

Trishant Dev, Programme Officer (Climate Change) at CSE, said that India's CBAM-covered goods exports to the EU accounted for 9.91 per cent of its total goods exports to the bloc in 2022-23.

He said 26 per cent of India's aluminium and 28 per cent of its iron and steel exports were destined for the EU in 2022-23. These sectors dominate the basket of CBAM-covered goods shipped from India to the EU.

In 2022-23, the exports of CBAM-covered goods to the EU made up about one-fourth (25.7 per cent) of India's total such goods exported globally, which is significant for the industries operating in these sectors.

Currently, hydrogen and electricity are not exported from India to the EU.

Of India's total goods exported worldwide, CBAM-covered goods exports to the EU constitute only about 1.64 per cent.

The report recommended a counter-tax on rich countries historically responsible for climate change.

Countries that have not historically contributed to the climate crisis may consider imposing a 'historical polluter tax' on trade partners to fund their own decarbonisation efforts, the report said.

This tax could be levied on trade partners responsible for a significant share of cumulative historical carbon dioxide emissions since the pre-industrial period, Avantika Goswami, who leads CSE's climate change programme and the report's co-author, said.

Historical trends indicate that carbon-intensive production has shifted from developed to developing countries, creating disparities in emissions intensity between nations.

Today's differences in emissions intensity are also tied to historical emissions, as the Global North utilised fossil fuels like coal during the early stages of the Industrial Revolution which enabled it to amass wealth and grow its economies.

The imposition of a CBAM overlooks this historical context and unfairly penalises the Global South. It is not retaliation, but rather a necessary course correction for the South to impose costs on the North for years of cheap polluting energy use, offshoring, and reliance on inexpensive offsets, Goswami said.

The CSE report also recommended collecting a carbon tax domestically to avoid being taxed in Europe.

Countries like India could institute their own carbon tax on exports of CBAM products destined for the EU or any country imposing a carbon border tax.

Revenues generated from a domestic carbon tax could be directed into a government-managed fund to support the decarbonisation efforts of Indian industries.

By collecting a carbon tax domestically, they said India can exert greater control over its mitigation strategies and achieve decarbonization more effectively.