Union finance minister Nirmala Sitharaman recently minced no words in admonishing the European Union for its decision to unilaterally impose a ‘carbon tax’ on all carbon-intensive goods entering the region. The minister went as far as saying that the tax is morally incorrect and goes against the interest of developing countries. She is not alone in calling out the unreasonable levy. Union Commerce Minister Piyush Goyal said India would retaliate against unfair carbon taxes. As the date for the imposition of a carbon tax is coming closer—the tax comes into effect from January 1, 2026—the pushback against such a levy is getting stronger from the developing countries. Recently, the president of the African Development Bank warned that Africa might lose $25 billion every year on account of carbon tax. The chasm between developing and developed nations is widening when it comes to finding solutions to climate change challenges. Different blocs of nations want to protect their own interests in the ongoing talks on climate change.
Through the imposition of the Cross Border Adjustment Mechanism (CBAM) or carbon tax, the EU seeks to dissuade high carbon-emitting industries by levying a tax on imports of cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen from January 1, 2026. Later on, the scope of the tax is likely to expand to other industries such as shipping. The supposed intention behind the move is to stop carbon leakage, which happens when carbon-emitting industries shift production to countries with weaker environmental laws. However, not many agree with this stated intention as they believe the EU could have simply taxed European industries shifting production out of Europe. Instead, the EU decided to impose a carbon tax on all imports. Insinuations have been made that the EU is using a carbon tax to protect its uncompetitive domestic industries from cheaper imports from developing countries.
As the world deliberates over the issue of climate change and finds a solution to this problem in the COP28 summit at Dubai, the acrimony over the imposition of a carbon tax could only get bitter. Industries in several countries in Africa, Asia and South America largely depend on fossil fuels. The transition to renewables is still at a very initial stage in these countries. The funding promised to these countries for the transition to renewables is slow, and they cannot afford to shift their industries to renewables in a year or two. Non-tariff barriers such as CBAM may disrupt trade talks at multilateral and bilateral levels, further expediting the de-globalisation of commerce and industries.