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Carbon tax threat to trade pacts

India has opposed measures such as CBT and has called it 'discriminatory' in a letter to the World Trade Organization

R. Suryamurthy New Delhi Published 17.04.23, 04:41 AM
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The West and Japan are taking steps to levy a carbon tax that threatens to impact a big chunk of India’s exports.

About 40 per cent of India’s exports will be hit by the proposed carbon border tax (CBT) as the EU and several developed countries such as the UK, Canada, Japan and the US are exploring their options on a carbon levy.


The proposed CBT will range between 20 per cent and 35 per cent for most products and analysts said, the country should sign FTAs only after resolving the vexed issue.

The EU will start working on the details of companies and sectors that may be taxed in six months, with the aim to impose the levy from January 2026. The UK has floated a detailed consultation paper for an early implementation of CBT.

The UK will also introduce Mandatory Product Standards by 2027 to prohibit the entry of products with high emission intensity.

Canada has announced plans to create its own CBT, while the US and Japan have also indicated their preferences for such a tax.The US does not have a proper carbon price mechanismnow.

It is estimated that these countries will start levying CBT between 2026 and 2028 on imports, analysts said.

Initially, the EU will charge CBT on steel, aluminium, cement, fertiliser, hydrogen, and electricity. The product list will gradually expand and by 2034, it will cover all products exported to the EU.

The UK proposes product coverage and timelines similar to those of the EU.

India despatches 38.3 per cent of its exports to the EU, the UK, Canada, Japan, and the US. CBT will hit all such products as the scheme coverage expands.

The products that could be impacted include cement, chemicals, glass, iron and steel, non-ferrous metals, non-metallic minerals, paper and pulp, refining, fertiliser, and power generation. The list will gradually cover all these products.

The CBT rates will vary from product and production processes. For example,CBT for cement could be 90 per cent of the product value.The rates are far higher than the EU’s average import tariff of 2.2 per cent for manufactured products.

“High CBT will make FTA-led zero duties meaningless. For example, 85 per cent of India-Japan trade take place at zero import duties. When Japan implements CBT, Japanese products will enter India at zero duty, but Indian products will pay high CBTs,” Ajay Srivastava, co-founder of Global Trade Research Initiative (GTRI), said.

“India is at an advanced stage of finalising its FTAwith the UK, it must seek clarification on this issue. CBT should be the top agendafor any FTA discussions of India.”

He said India needs to set up a carbon trading mechanism that will ensure the net impact of CBT may become lower or zero in a few cases.

“When the US imposed import duties on steel and aluminium from India, we retaliated by imposing import duty on an equal weightage of imports from the US. India must think about designing asimilar scheme to counter CBT.”

Biswajit Dhar, trade economist, Jawaharlal Nehru University, said: “The trade talks are veering towards regulatory standards which have significantly larger implications and need to be studied before moving towards any kind of agreement. There are several contentious issues in these standards relating to the environment, labour, IPR, and data protection among others, which would require changes in Indian laws if we were to accept the demands of the UK and the EU.”

India has opposed measures such as CBT and has called it “discriminatory” in a letter to the World Trade Organization (WTO).

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