European Union introduced new legislation, Fit for 55, to cut its GHG emissions by 55 per cent by 2030 and to net zero by 2050. This is a welcome step for climate action since it turns the EU’s announcement into law, protecting it from the winds of political change. It opens new markets for Indian industry, for example for electric vehicles. However, it also introduces a potentially adverse policy called the carbon border adjustment mechanism (CBAM).
The EU has had a carbon emission trading system since 2005, with a current market price of 50 euros per tonne of carbon. With Fit for 55, the EU will bring more sectors into this trading scheme and tighten its allocation of permits.
The EU’s carbon price is likely to go up as a result, making its domestic products more expensive than imports from countries that do not have such rules. The new CBAM is meant to level the playing field between domestic and imported products.
CBAM will require foreign producers to pay for the carbon emitted while manufacturing their products. Adding the price of carbon is meant to discourage consumers from buying carbon-intensive products and encourage producers to invest in cleaner technologies.
The adjustment will be applied to energy-intensive products that are widely traded by the EU, such as iron and steel, aluminium, cement, fertiliser, and electricity.
It may also affect downstream industries — for example, automobile manufacturers may buy domestic low-carbon steel rather than imported high-carbon steel.
India is Europe’s third-largest trading partner, and it does not have its own carbon tax or cap. So, CBAM should be a cause for concern for it.
A UNCTAD study released recently predicts that India will lose $1-1.7 billion in exports of energy-intensive products such as steel and aluminium — India’s goods trade with the EU was $74 billion in 2020.
The CBAM will undoubtedly be very complex to administer. The adjustment rate will vary by country and product, depending on the carbon intensity of the production technology and the electricity mix.
It will require verification of data reported by every foreign supplier, including intermediate products from third countries. It may have to rely on country defaults or sectoral benchmarks, at the risk of less than perfect outcomes.
The EU Parliament’s endorsement is expected to take two years, which will be followed by a three-year transition period before the CBAM is imposed in 2026.
What should Indian industry do to prepare in the interim?
First, it should enter clean technology partnerships with European industry. For example, India exports semi-finished and flat-rolled products of iron or non-alloy steel, but such partnerships can help enhance the competitiveness of its high-technology stainless or alloy products.
Second, Indian companies should invest in more renewable electricity and energy efficiency. They can adopt science-based targets for emission reduction and internal carbon pricing to incentivise low-carbon choices.
The government can extend the perform-achieve-trade scheme to more industries and provide finance to MSMEs to upgrade to clean technologies. WRI India’s analysis shows that carbon dioxide emissions from the iron and steel industry can be reduced from 900 million tonnes to 500 million tonnes in 2035 through greater electrification, green hydrogen, energy efficiency, and material efficiency.
Third, India can try to diversify its exports to other markets and products. For instance, it could increase its market share of crude steel compared to more emission-intensive producers like China, Russia and Ukraine.
At present, the CBAM may seem obstructionist. But over the long-term, it can provide regulatory certainty to industry by harmonising carbon prices, and Indian industry can position itself as a strong player in the trade landscape of the future.
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.