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What is the story about?
The coming into force of the India-EU FTA is making steady progress. From all accounts we can expect it to be approved by all EU countries and become operational by the end of the year or latest early next year. And this will be great news for Indian exporters. For as Article 1.1 of the FTA proclaims ‘the objectives of this Agreement are to liberalise trade and investment, facilitate trade, and foster a closer economic relationship between the Parties’.
But in trade agreements as India has repeatedly learnt nothing is as it seems to be. Annexure 14-A of the same agreement spells out the carbon border trade measures (CBAM). It may be recalled that CBAM had come into force vide EU’s Regulation (EU) 2023/956 which established the carbon border adjustment mechanism This seeks to impose on imports into the EU the same conditions which domestic European manufacturers are subject to of having to pay a tax when manufacturing carbon-intensive goods.
Carbon essentially in the form of carbon-di-oxide (CO2) acts as a greenhouse gas that traps heat in the atmosphere causing global temperatures to rise which leads to climate change-extreme weather. What CBAM seeks to do is to impose a tax on goods manufactured in another country which has polluted the atmosphere in that country when these goods are imported into the EU.
The tax is in the form of carbon certificates which importers are required to buy matching EU carbon prices. It is a moot point whether such a levy is WTO compliant-but couched as it is in terms of the Paris Accord’s larger environmental goals and the EU’s commitment to reduce greenhouse gas emissions in EU by at least 55% compared to 1990 levels by 2030, all countries exporting to EU are willy-nilly seeking to comply with the requirement.
Also Read: India–EU FTA: Who wins, who loses
India too is a signatory to the Paris accord. India has since 2023 put in place a carbon credit trading scheme (CCTS) which was introduced under the Energy Conservation (Amendment) Act. This Act establishes the Indian Carbon Market (ICM) in accordance with our Paris Accord commitments. What the CCTS seeks to do is to create a market-based mechanism with an aim to regulate and trade carbon credits under the ICM.
The goal being to decarbonise the economy by fixing a price on any polluting greenhouse gas emissions. It mandates energy intensive industries to meet specific greenhouse gas reduction targets. Iron & steel, aluminium, cement, fertilizer, textiles are among the Indian industries identified presently. It is estimated that these industries account for a significant portion of the country’s total emissions. Carbon credits are awarded. One carbon credit being equal to one metric tonne of CO2 removed or avoided. These credits can be sold by those companies which generate excess credits
— and purchased by those who do not comply. This is of significance in the context of India-EU FTA.
Prof. Archie Parnell of the O. P. Jindal Global University School of Law has in a perceptive piece suggested that India can effectively use the CCTS to avoid the rigors of Annexure 14 A of the India-EU FTA. He has drawn attention to Article 9 of the EU Regulation on CBAM. Prof. Parnel has suggested a levy of a Indian Border Adjusted Mechanism (IBAM) to be imposed at the point of export in India. This he says will meet the requirement of a carbon paid price in the country of origin envisioned in the Article 9 of the EU Regulation on CBAM.
However, I would argue otherwise. Article 9 authorises a CBAM declarant to ‘claim in the CBAM declaration a reduction in the number of CBAM certificates to be surrendered in order to take into account the carbon price paid in the country of origin (emphasis added) for the declared embedded emissions. The reduction may be claimed only if the carbon price has been effectively paid in the country of origin. In such a case, any rebate or other form of compensation available in that country that would have resulted in a reduction of that carbon price shall be taken into account’.
Thus, in effect in the context of Indian exports of items which are likely to get impacted I would suggest a set-off can be claimed to the extent of the CCTS availed in India. For instance India is a major exporter of iron & steel products to Italy, Belgium, Spain, Germany and Poland. The CBAM charge on these products when imported into EU is likely to be in the region of Euro 65-70 per tonne. In the event of data not been correct or verifiable a penal rate of up to Euro 250-300 per tonne can be imposed. However, if the Indian exporter has verifiable CCTS certificates on their exports the impact can be substantially reduced if not completely eliminated. This is subject to a caveat as indicated below.
Annexure 14 A of the India-EU FTA referred to earlier has provisions for technical dialogue where technical exchanges on implementation of carbon border adjustment mechanisms are to be exchanged. The Article 3 of this Annexure has also highlighted the possibility of mutual recognition of accreditation bodies. Thus, Indian exporters can exploit this legal provision. This will be subject to the Indian commerce negotiating team enlightening the EU officials about the mechanism of CCTS. We will have to ensure the integrity of the CCTS process so that check and verification is possible by a third party.
As I have argued ‘price paid in the country of origin’ requirement can be met through the CCTS mechanism. This mechanism in effect rewards industries who incur the extra expenditure, pay the price, to ensure their products are environmentally friendly. It be noted that Article 9 does not talk of a tax but only of a ‘price’. Again, I emphasise this will be possible only if our negotiators can persuade the EU team of the integrity of the CCTS process.
Given the negotiation skills they have demonstrated thus far in the recent FTAs this should not be difficult. In the meantime our CBAM impacted exports will face an extra charge which will make their products less competitive in the EU market. It should be remembered that there are similar provisions in the India-UK FTA too and the EU experience will hold us in good stead. If this does not work then the way forward is the suggestion of Prof. Parnell— impose IBAM. And if that be so, it will disincentivise the Indian exporter from going the CCTS route.
—The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs (CBIC). The views are personal.
But in trade agreements as India has repeatedly learnt nothing is as it seems to be. Annexure 14-A of the same agreement spells out the carbon border trade measures (CBAM). It may be recalled that CBAM had come into force vide EU’s Regulation (EU) 2023/956 which established the carbon border adjustment mechanism This seeks to impose on imports into the EU the same conditions which domestic European manufacturers are subject to of having to pay a tax when manufacturing carbon-intensive goods.
Carbon essentially in the form of carbon-di-oxide (CO2) acts as a greenhouse gas that traps heat in the atmosphere causing global temperatures to rise which leads to climate change-extreme weather. What CBAM seeks to do is to impose a tax on goods manufactured in another country which has polluted the atmosphere in that country when these goods are imported into the EU.
The tax is in the form of carbon certificates which importers are required to buy matching EU carbon prices. It is a moot point whether such a levy is WTO compliant-but couched as it is in terms of the Paris Accord’s larger environmental goals and the EU’s commitment to reduce greenhouse gas emissions in EU by at least 55% compared to 1990 levels by 2030, all countries exporting to EU are willy-nilly seeking to comply with the requirement.
Also Read: India–EU FTA: Who wins, who loses
India too is a signatory to the Paris accord. India has since 2023 put in place a carbon credit trading scheme (CCTS) which was introduced under the Energy Conservation (Amendment) Act. This Act establishes the Indian Carbon Market (ICM) in accordance with our Paris Accord commitments. What the CCTS seeks to do is to create a market-based mechanism with an aim to regulate and trade carbon credits under the ICM.
The goal being to decarbonise the economy by fixing a price on any polluting greenhouse gas emissions. It mandates energy intensive industries to meet specific greenhouse gas reduction targets. Iron & steel, aluminium, cement, fertilizer, textiles are among the Indian industries identified presently. It is estimated that these industries account for a significant portion of the country’s total emissions. Carbon credits are awarded. One carbon credit being equal to one metric tonne of CO2 removed or avoided. These credits can be sold by those companies which generate excess credits
Prof. Archie Parnell of the O. P. Jindal Global University School of Law has in a perceptive piece suggested that India can effectively use the CCTS to avoid the rigors of Annexure 14 A of the India-EU FTA. He has drawn attention to Article 9 of the EU Regulation on CBAM. Prof. Parnel has suggested a levy of a Indian Border Adjusted Mechanism (IBAM) to be imposed at the point of export in India. This he says will meet the requirement of a carbon paid price in the country of origin envisioned in the Article 9 of the EU Regulation on CBAM.
However, I would argue otherwise. Article 9 authorises a CBAM declarant to ‘claim in the CBAM declaration a reduction in the number of CBAM certificates to be surrendered in order to take into account the carbon price paid in the country of origin (emphasis added) for the declared embedded emissions. The reduction may be claimed only if the carbon price has been effectively paid in the country of origin. In such a case, any rebate or other form of compensation available in that country that would have resulted in a reduction of that carbon price shall be taken into account’.
Thus, in effect in the context of Indian exports of items which are likely to get impacted I would suggest a set-off can be claimed to the extent of the CCTS availed in India. For instance India is a major exporter of iron & steel products to Italy, Belgium, Spain, Germany and Poland. The CBAM charge on these products when imported into EU is likely to be in the region of Euro 65-70 per tonne. In the event of data not been correct or verifiable a penal rate of up to Euro 250-300 per tonne can be imposed. However, if the Indian exporter has verifiable CCTS certificates on their exports the impact can be substantially reduced if not completely eliminated. This is subject to a caveat as indicated below.
Annexure 14 A of the India-EU FTA referred to earlier has provisions for technical dialogue where technical exchanges on implementation of carbon border adjustment mechanisms are to be exchanged. The Article 3 of this Annexure has also highlighted the possibility of mutual recognition of accreditation bodies. Thus, Indian exporters can exploit this legal provision. This will be subject to the Indian commerce negotiating team enlightening the EU officials about the mechanism of CCTS. We will have to ensure the integrity of the CCTS process so that check and verification is possible by a third party.
As I have argued ‘price paid in the country of origin’ requirement can be met through the CCTS mechanism. This mechanism in effect rewards industries who incur the extra expenditure, pay the price, to ensure their products are environmentally friendly. It be noted that Article 9 does not talk of a tax but only of a ‘price’. Again, I emphasise this will be possible only if our negotiators can persuade the EU team of the integrity of the CCTS process.
Given the negotiation skills they have demonstrated thus far in the recent FTAs this should not be difficult. In the meantime our CBAM impacted exports will face an extra charge which will make their products less competitive in the EU market. It should be remembered that there are similar provisions in the India-UK FTA too and the EU experience will hold us in good stead. If this does not work then the way forward is the suggestion of Prof. Parnell— impose IBAM. And if that be so, it will disincentivise the Indian exporter from going the CCTS route.
—The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs (CBIC). The views are personal.
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