European Commissioner Wopke Hoekstra’s recent statement at the UN Climate Summit that the main goal of the  Carbon Border Adjustment Mechanism (CBAM) was to stop carbon leakage was flawed, according to research body Global Trade Research Initiative.

While the CBAM taxes would hit global trade significantly, emission reduction would be minimal, according to a recent GTRI analysis.

“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 of the EU firms, which have shifted production to other countries. However, the EU chose to tax all world imports through CBAM,” said Ajay Srivastava, Founder, GTRI. 

Also, 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. 

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“The EU chose to ignore such key competitive reasons. It is thus opposed to the concept of offshoring of production,” he added. 

The CBAM seeks to put a “fair” price on carbon emitted during production of carbon intensive items in non-EU countries, when they are imported into the bloc. Since the EU companies already face a carbon price for their emissions, the CBAM seeks to level the field.

While the transition period for CBAM began on October 1, 2023, wherein importers need to report the embedded carbon content in their imports on a quarterly basis till the end of 2025, the carbon tax regime will kick in from January 2026. 

CBAM will not reduce global emissions, as it does not stop import of high-emission goods, but merely taxes them, the analysis said.

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, it added.

The real reasons for the EU’s introduction of CBAM could be to protect uncompetitive local industries from cheaper imports and earn considerable revenue to fund its budget, the analysis said.

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The EU regulation imposes a higher tax on products from poor countries, the analysis noted. “Let us assume the trading price for a tonne of carbon dioxide emission at the EU Emission Trading System (ETS) is $90. The price in Australia is $35, China $5, and India zero. CBAM tax in the EU will be the difference between the EU and exporting countries’ carbon prices. So Australian exporters will pay the least tax at $55 per tonne. Exporters from China and India will pay $85 and $90, respectively,” it explained.

Commerce Minister Piyush Goyal earlier said, if needed, India will retaliate against CBAM.

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