India’s tryst with the evolving climate levies

To encourage businesses to adopt green practices and avoid situations of carbon leakage, the EU has implemented a new levy called the Carbon Border Adjustment Mechanism (CBAM).

Countries around the world are exploring mechanisms to compel industries to reduce their carbon footprint. However, this poses significant challenges for businesses amid global volatility, inflation and margin pressures. To encourage businesses to adopt green practices and avoid situations of carbon leakage, the EU has implemented a new levy called the Carbon Border Adjustment Mechanism (CBAM). This mechanism computes the carbon emissions embedded in goods imported into the EU and accordingly, proposes to charge a levy on such embedded emissions. Recently, a similar mechanism has also been announced by the UK, initially targeting these levies on select carbon-intensive products like steel, cement, aluminium, and fertilisers, among others, with potential expansion in the coming years. 

The implications of levies such as CBAM are concerning for developing nations, particularly those exporting to other jurisdictions like the EU and UK. Such levies make the exports from these developing nations less competitive as their adoption of green technologies is much lower. The pertinent question is: how should countries exporting to these jurisdictions respond to safeguard their exporters and utilise the funds generated from such levies? India has raised a dispute at the WTO and initiated discussions bilaterally with the EU and UK for an amicable solution, including the possibility of deferral of the levy for Indian exporters. Additionally, Indian exporters have raised several doubts about the emission data requirements under these frameworks and the protection of sensitive business information.

It is noteworthy that these levies offer some offset for domestic carbon taxes imposed by the exporting country. However, as variations in parameters for carbon levies across countries are different, a standard offset mechanism may not be feasible; moreover, carbon pricing itself varies globally. Furthermore, the benefit of introducing domestic carbon taxes in countries like India is that the revenue collected would remain within the country, which the government can use to incentivise the adoption of green technologies for businesses. This approach is potentially aligned with the objectives of the EU/ UK because such a levy of carbon tax by India would result in additional costs for the exporters of carbon-intensive products. 

While imposing a new levy involves complexity, the Indian government would need to lay sufficient groundwork around the legality of such tax, its ambit, rate and manner of computation for each industry that may be covered under the levy. A comprehensive offset mechanism similar to DTAA arrangements with other countries is also crucial. The immediate requirement is to develop a comprehensive and effective green tax framework that could fund the deployment of green technologies in India. 

Another proposition by developing nations is for the EU to collect CBAM revenue and remit it to the exporting nations for deploying green technologies. This is challenging as the EU/ UK may use the revenue domestically for the technological development of their local industries.

From a green incentives standpoint, the government could build more mechanisms to incentivise green reforms and extend green subsidies to domestic manufacturers. An example of this could be by way of extending higher incentives under central schemes (such as existing and new Production Linked Incentive schemes) and state industrial schemes for investments in carbon emission reduction mechanisms and sustainable technologies.

India could also consider prioritising carbon-related disclosures such as Business Responsibility and Sustainability Reporting, tax transparency reporting as well as ensuring the development of a mature domestic carbon trading system, among others. India needs to focus on multi-pronged strategies so that effective mechanisms can be put in place not only to fight climate change but also to address the resultant adverse impacts on its economy. 

Source:- Financial Express