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Carbon Border Adjustment Mechanism UPSC NOTE

 


India’s concerns

  • India fears that CBAM will cripple the export of its carbon-intensive products to the EU.

  • India’s exports may be limited to aluminium, iron, and steel, and affect only 1.8% of its total exports to the EU.

  • India has reportedly decried CBAM as being protectionist and discriminatory.

  • There is also talk of challenging the CBAM at the World Trade Organization (WTO)’s dispute settlement body.

CBAM and WTO

  • A cornerstone principle of WTO law is non-discrimination.

  • Thus, countries are required to accord equal treatment to ‘like’ products irrespective of their country of origin (most-favoured nation treatment) and to treat foreign-made ‘like’ products as they treat domestic ones (national treatment principle).

  • CBAM’s design is origin-neutral in appearance.

  • CBAM may, in its application, discriminate between goods from different countries on account of:

    • An inadequate carbon pricing policy, or 

    • Due to onerous reporting requirements that importers would be subject to.

  • Traditionally in WTO jurisprudence, must processes and production methods are not relevant for comparing products. 

  • On that account, the CBAM violates WTO law for discriminating between EU and foreign products covered by CBAM based on the embedded emissions.

  • However, even if the EU’s CBAM is discriminatory, there could be a claim for justifying it under the General Exceptions clause given in Article XX of the General Agreement on Tariffs and Trade (GATT).

  • Under Article XX, measures taken by countries that otherwise violate GATT obligations are permitted if:

    • They fall under one of the listed policy grounds.

    • They satisfy the requirements of the introductory clause of Article XX, known as the chapeau.

  • The introductory clause of Article XX (its chapeau) emphasizes the manner in which the measure in question is applied. 

    • which inter alia requires that countries do not apply measures in a manner that results in arbitrary or unjustifiable discrimination between countries where the same conditions prevail.

  • One of the listed policy grounds in Article XX is ‘conservation of exhaustible natural resources’. CBAM would fall under this category.

Challenges

  • As commentators argue, the CBAM only considers ‘explicit’ carbon prices, not ‘implicit’ costs (non-price-based costs) borne by products originating in certain countries. 

  • Accordingly, it arbitrarily or unjustifiably discriminates between countries where the same environmental conditions exist.

  • Whether the carbon-intensive products to which the CBAM applies are ‘like’?

    • While steel products may appear similar, the process by which electric arc furnaces produce steel is less carbon-intensive than the steel produced in blast furnaces, for instance. 

    • Being products that are not ‘like’, the rules on non-discrimination would have little application in such a case.

What is Emissions Trading System (ETS) in EU?

  • In 2005, the EU adopted a climate change policy known as the Emissions Trading System (ETS).

  • ETS is a market-based mechanism that aims at reducing GHG emissions by allowing bodies emitting GHG to buy and sell these emissions amongst themselves.

  • It has a mechanism for its domestic industries.

  • Emissions embedded in products imported from other countries may not be priced in a similar way due to a lack of stringent policies or due to less stringent policies in those countries.

  • The impacted industries in the EU receive free allowances or permits under the ETS.

  • The EU apprehends the phenomenon of ‘carbon leakage’, that is, due to the application of ETS, European firms operating in carbon-intensive sectors might possibly shift to those countries that have less stringent GHG emission norms.

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Carbon Border Adjustment Mechanism UPSC NOTE
Carbon Border Adjustment Mechanism UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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