EU carbon tax hurdle for global trade

Carbon leakage is the phenomenon of companies moving production to countries with weaker environmental regulations to avoid paying carbon prices in the EU. This objective could have been achieved by merely taxing imports from the EU firms, which have shifted production to other countries. However, the EU chose to tax all world imports through CBAM, said Ajay Srivastava, co-founder, GTRI

Green House

• Fossil fuels contribute to 90% of Greenhouse
• They account for 75% of carbon emissions
• The EU should heavily tax fossil-fuel imports

New Delhi: The decision of the European Union (EU) to impose a carbon tax on certain sectors like metals from 2026 will only hurt global trade and not help in containing carbon emissions, think tank GTRI said on Sunday.

The Global Trade Research Initiative (GTRI) said that European Commissioner Wopke Hoekstra remarks that the sole aim of CBAM (Carbon Border Adjustment Mechanism) is to prevent carbon leakage which has significant flaws. It added that fossil fuels contribute to 90 per cent of Greenhouse and 75 per cent of carbon emissions and if decarbonization is the goal, the EU should heavily tax fossil-fuel imports.

“Carbon leakage is the phenomenon of companies moving production to countries with weaker environmental regulations to avoid paying carbon prices in the EU. This objective could have been achieved by merely taxing imports from the EU firms, which have shifted production to other countries. However, the EU chose to tax all world imports through CBAM,” said GTRI co-founder Ajay Srivastava. Ajay argued that a firm may relocate to another country to access better technology, cheap labour, tax incentives, subsidised land and power and not just to evade carbon taxes.

“The EU chose to ignore such key competitive reasons. The EU thus is opposed to the concept of offshoring of production. CBAM will not reduce global emissions, as it does not stop importing high-emission goods but merely taxes them,” he said adding “The CBAM will hurt global trade and not stop carbon leakage”.

According to the UNCTAD Trade and Development Report 2021, CBAM is estimated to reduce global carbon emissions by not more than 0.1 per cent, he said.