The ‘green’ paradox

On October 1, the European Union (EU) kicked off the initial phase of a Europe-wide tax on carbon in imported goods. The Carbon Border Adjustment Mechanism (CBAM), is a tariff that will be imposed on certain types of carbon-intensive products which are imported into the EU. It is stated that from October 2023 to December 2025, importers of goods covered by the CBAM will need to declare emissions in those products, but they won’t have to buy any carbon allowances. However, from 2026 importers will have to buy CBAM certificates (a kind of border tax) to cover these “embedded” emissions. It is argued that the border tax will provide an incentive for other countries to model their own carbon prices after the EU emissions trading plan. The obligation for importers under CBAM to pay a charge in respect of their imports will enter into force on January 1, 2026. Analysts believe that as a part of EU’s trade policy for green energy, the CBAM seeks to strike a balance between the carbon pricing norms that apply to goods imported into EU and the goods produced domestically in EU.

The first reporting period for importers will end on January 31, 2024. It establishes a price on carbon emitted during the production of carbon-intensive goods that are at risk for carbon leakage — such as cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen while entering the EU.

CBAM wants to address Scope 3 emissions. Unlike Scope 1 (the GreenHouse Gas emissions that a company makes directly) and Scope 2 emissions (the emissions a company makes indirectly – like when the electricity or energy it buys for heating and cooling buildings), Scope 3 emissions covers all the emissions associated, not with the company itself, but that the organisation is indirectly responsible for, up and down its value chain.

Since 2005, the EU has levied a carbon price on highly polluting industries within its own borders, requiring manufacturers to buy carbon credits to cover the carbon they emit or risk heavy fines. It is claimed that the EU carbon market is the busiest for carbon credit trading. EU-Emissions trading systems (ETS) use the cap-and-trade approach — capping emissions at a specific amount per company and allowing over-polluters to buy unused credits from under-emitters. While ETS prioritises goods that are produced within the EU borders, CBAM focuses on imports into the EU. Any exporter that is selling goods into the EU and whose goods are being imported will be impacted, if they fall within the parameters of CBAM. Boston University calculates that under the current scope of the regulation, India’s total exports to the EU will fall by 2.7 per cent compared to the baseline without CBAM and the GDP will decline by -0.043 per cent in 2030.

Carbon credits, also known as carbon offset credits or carbon allowances, are a way for companies to offset their carbon emissions by investing in renewable energy and other carbon reduction projects. Companies that exceed emissions standards set by regulatory bodies can purchase carbon credits from companies that generate carbon offset credits by reducing greenhouse gas emissions. By doing so, they can comply with regulations without making significant changes to their operations. The Kyoto Protocol established the carbon credit system in 1997. The United Nations’ Clean Development Mechanism (CDM), initiated under Kyoto Protocol, is one example of a non-government issuer of carbon credits.

An UNCTAD study (2021) observes that the introduction of a CBAM would result in decline in exports in developing countries in favour of developed countries, which tend to have less carbon intensive production processes. The study also indicates that the European Union could consider CBAM neighbouring policies, including the use of revenue generated by the CBAM, to accelerate the diffusion and uptake of cleaner production technologies to developing country producers. Thus CBAM is likely to produce a huge market for green technology in the developing countries as observed after the introduction of Clean Development Mechanism (CDM) in 1997.

It may be recalled that the Clean Development Mechanism (CDM) under the Kyoto Protocol is the world’s first international carbon finance scheme. Companies could acquire tradable certified emission reduction (CERs) credits by investing in energy conservation and new energy projects in developing countries. Despite its early success, the scheme collapsed following a ‘carbon panic’ in 2012. The CDM scheme was originally intended to make it easier for the EU and Japan, which were obligated to reduce carbon emissions under the Kyoto Protocol, to achieve their emission reduction targets through investing in developing countries. The CERs issued under the CDM have been traded and priced in major commodities exchanges around the world. In 2008, the first year of the first commitment period (2008–12), the credit price hit a record high of €25 per tonne of CO2. Huge investments were made in green technology by the companies operating in the developing countries, including India, in the hope of earning good return by selling CERs in the global carbon exchanges. Between 1997 and 2012, nearly 6,600 CDM projects were registered under the scheme, while certified emission reductions (CERs) credits totalling around 1.2 billion tonnes of CO2 were issued. As more certified emission reduction credits were issued, the credit price gradually fell, down to €10 per tonne of CO2 and in 2012 the credit price crashed, falling to a meagre €0.5 per tonne of CO2.

The collapse of Kyoto Protocol in general and CDM in particular has made the developing countries very sceptical about these emissions trading mechanisms. While the EU and Japan used CDM as a carrot to the developing south, it appears that the EU is planning to use CBAM as a stick to create a global market for green technology as part of its plan to decarbonise the economy by 2050. Under this grand plan on Carbon Border Adjustment Mechanism, the much desired debates on ‘climate justice’ and ‘historical responsibility of climate change’ have taken the back seat. Hopefully, in the upcoming 28th Conference of Parties (COP28), starting on November 30, the Global South will raise these and other important issues like formalisation of binding commitments on carbon crediting guidelines. The developed countries have converted the climate threat into an opportunity. It’s a big business now. Global South should also develop its own agenda.

Views expressed are personal