Climate-based protectionism
Context:
Recently, India showed its criticism against the European Union’s Carbon Border Adjustment Mechanism (EU-CBAM), the Corporate Sustainability Due Diligence Directive, and the EU Deforestation Regulation owing to the protectionist economic policy on imports.
Relevance:
GS-02 GS-03 (International Relations, Economy)
Dimensions of the Article:
- Protectionism Through Climate Policies
- What is CBAM?
- India’s Concerns and Arguments
Protectionism Through Climate Policies:
- Protectionism refers to the economic policy of restricting imports to protect domestic industries from foreign competition.
- Usually it is achieved through tariffs, quotas, or subsidies; the article highlights “climate-based protectionism” as a new and evolving strategy.
- The EU’s climate regulations, like the Carbon Border Adjustment Mechanism (CBAM), impose carbon costs on imports, which shifts the economic burden of climate action onto exporting nations under the guise of reducing global carbon emissions.
- The worst hit in this case are the developing countries like India.
What is CBAM?
- The Carbon Border Adjustment Mechanism (CBAM) is one of the EU’s climate regulations that levies carbon costs equivalent to those borne by EU-produced goods on their imported goods.
- Under this, the exporters must:
- Report the emissions associated with their products.
- Purchase certificates matching the carbon content of their goods.
- Implementation Timeline: From January 1, 2026.
- Economic Implications for India:
- The EU accounts for 20.33% of India’s total merchandise exports, with 25.7% of these exports falling under CBAM regulations.
- Key sectors impacted:
- Iron and Steel: constitute 76.83% of the affected exports.
- Other sectors: Aluminium, cement, fertilisers.
- Indian exporters, especially in energy-intensive industries, face compliance costs that may erode their global competitiveness.
India’s Concerns and Arguments
- Lack of Preparedness Time
- The EU spent over a decade preparing for its own emission reductions, starting with the 2008 EU Climate Action and Renewable Energy Package and culminating in the European Green Deal (2019).
- In contrast, developing nations like India are expected to adapt to CBAM in a much shorter period, despite lacking comparable resources or technologies.
- Revenue Retention by the EU
- CBAM is projected to generate €5-14 billion annually by 2030, with the revenue being directed towards EU programmes like NextGenerationEU.
- India argues that such revenues should be shared with non-EU trading partners, especially developing nations, to fund:
- Capacity-building programmes.
- Technology transfer initiatives.
- Renewable energy projects.
- Unfair Allocation of Emission Responsibilities
- CBAM adheres to a production-based accounting system where exporting nations bear responsibility for emissions, regardless of where the goods are consumed.
- India proposes an alternative, equity-based accounting (EBA), which distributes carbon responsibilities among trade partners based on:
- Per capita GDP.
- Per capita emissions.
- Trade benefits and avoided emissions.
- This approach better reflects historical and developmental differences between nations.
- Violations of Global Climate Principles
- CBAM undermines the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC) by:
- Ignoring historical emissions by developed nations.
- Failing to acknowledge the limited capacities of developing economies to implement stringent emission controls.
- It also overlooks concepts of compensatory and distributive justice, which are critical for equitable climate policies.
- Economic Risks
- Indian industries could face significant costs for compliance, reducing their competitiveness in the EU market. This could lead to:
- Loss of market share for Indian exporters.
- Negative impacts on domestic employment in key sectors like steel, aluminium, and fertilisers.
- Challenges in Building Consensus
- While India seeks to lead the Global South, other developing nations may not align with its stance due to varying economic goals, trade dependencies, and climate strategies.
- This fragmentation could weaken the collective response to protectionist measures like CBAM.
Way forward:
- India should collaborate with other developing nations and propose a unified stance at the COP discussions, like equity-based accounting, to ensure fairness in emission responsibilities.
- Developing countries should urge the EU to channelise the CBAM revenue to capacity building, technology transfer, and renewable energy projects in less-developed economies.
- Moreover, it is high time for India to invest in low-carbon technologies and expand renewable energy infrastructure, aligning with its broader climate goals.
