EU’s ‘Fit for 55 Package’ and Pricing of Carbon: why should the developing countries be wary of it?

by Jeremy

A large European Union flag lies at the center of Schuman square, outside the European Commission headquarters. (Photo source: Reuters)

James J. Nedumpara & Sathiabama. S

The European Union’s long-awaited and controversial carbon pricing proposal is officially published. The carbon ‘tax’ is part of the carbon border adjustment mechanism (CBAM) and an integral element of the European Green Deal. The CBAM is adopted as part of the ‘Fit for 55 Package’—policies fit for reducing net greenhouse gas emissions in Europe by at least 55% compared to 1990 levels by 2030. The stated objective of the CBAM is to prevent carbon leakage and achieve carbon neutrality by penalizing carbon emissions in select carbon-intensive sectors. Stated in simple terms, the EU is keen to prevent its industries from moving to third countries, where the climate change and environmental regulations could be lax or less strict. The EU also considers that international trade would support the global efforts to achieve sustainable development goals.

Pigouvian taxes (taxes that address a negative externality, named after renowned British Economist Pigou) or similar measures to curb carbon emission is not a new idea. However, the larger issue is whether such a carbon pricing scheme would be imposed on cross-border trade by disregarding all considerations relating to the development, equity, global cooperation, and the principle of ‘common but differentiated responsibilities and respective capabilities. The CBAM is not the European Union’s first initiative against carbon emission. The European Emissions Trading System (ETS), introduced in the backdrop of the United Nations Framework Convention on Climate Change (UNFCC), sought to put a price on carbon emissions. The ETS functioned based on ‘cap-and-trade, or fixed maximum amount of carbon emissions, with an allocation of specified free allowances. The CBAM will substitute the ETS in selected sectors, while the ETS will continue in some form. In this opinion piece, we reflect upon the WTO compatibility of the CBAM and its impacts on developing countries like India.

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