Skip to content

EU’s Carbon Border Taxes and Joe Biden’s Clean Energy plans: A double threat for developing countries

Vijay Raj, India

The introduction of the European Union’s Carbon Border Taxes and Joe Biden’s announcement of Clean Energy plans has raised double alarm in developing countries.

The new European Carbon Border Adjustment Mechanism (CBAM) law will impact all countries exporting to EU, especially those countries without carbon pricing mechanisms. Countries like India, China, Indonesia, Philippines, and even developed ones like Australia, Poland are likely to significantly affected by the CBAM.

Climate Justice and Carbon Border Taxes

The European Commission introduced the idea of CBAM in December 2019, as part of its EU Green Deal. The CBAM is likely to become a reality in 2021. But the EU’s large-scale climate-sanction through its CBAM will be treated with hostility in India, China and most developing countries.

Developing countries will view the CBAM as incompatible and inconsistent with the climate justice principle, a principle that is recognised by the parties of Paris Agreement, allowing developing countries to continue to use fossil fuels as well as receiving $100 billion p.a. in climate funds.

Big developing economies like India, Brazil, and China have always argued that the per capita emissions in the U.S. and EU are much higher than their own economies, and thus have rejected attempts by developed nations to introduce carbon border taxes in the past.

A CBAM at this juncture will cause more frictions among the nations and lead to greater objections to the commonly agreed goals under the Paris Climate Agreement.

Potential impact of CBAM and responses in India

India has called for a legal analysis of the deal to make sure that the proposed taxations from EU and U.S. do not impact its industries and economy.

Morgan Stanley’s review predicts that a carbon tax of $40 per ton of emissions will increase the cost of producing aluminum by more than 20% in China and India.

As a response to these taxes from EU and the U.S., the developing countries may introduce taxes of their own as a counter-measure to absorb the damage from the loss in export revenue and to signal their displeasure.

India and U.S. for example were involved in a tax-tussle during Trump’s term, where India reacted to U.S. taxations with counter-taxes on U.S. imports. EU imports a wide range of commercial and industrial products from India including chemicals, fabric, cement, and metals, and the CBAM will affect all these industries. The CBAM would impact most large industries in these sectors except for few Indian cement producers like Dalmia Bharat and Ambuja Cements as they’ve already taken measures to reduce carbon emissions.

Biden’s plans and energy use in developing countries

To make things more challenging, similar climate policies announced by the incoming Biden administration means that countries like India should also prepare for an US-influenced disruption in the fossil fuel sector.

Biden administration is likely to roll out its clean energy plan which has called for policies and actions that will aim to achieve a “carbon free power sector by 2035”.

The official page states that the policy will be “one that will put the United States on an irreversible path to achieve net-zero emissions, economy-wide, by no later than 2050.”

It remains to be seen how this transition policy will apply to the U.S. exports of oil, gas, and coal, especially for importers like India. The Trump administration highly favoured the production and export of oil, and it is still unclear if it will be the same during Biden’s administration.

Source: US Energy Information Administration

The U.S. petroleum exports doubled between 2015 and 2019. Among its biggest customers are developing countries like India, Brazil, and Mexico. All these countries could see a disruption in oil imports under Biden administration.

Likewise, the US natural gas exports were on an increase in the past three years. Among the developing countries, Mexico, India and Chile were the biggest importers of US Liquid natural gas in 2019.

India particularly has been heavily reliant on US oil and gas. India’s LNG imports from U.S. skyrocketed from around 21,000 million cubic feet in 2017 to around 92,000 million cubic feet in 2019.  

A Biden administration constraint on US oil and gas production would put the Indian oil and gas sector in trouble, especially when they have begun to move away from their traditional suppliers in Middle East like Iran.

But it is quite uncertain as to how fossil fuel exports or the trade relationships will evolve in the next few years. India, for example, has expressed its interest in resuming oil imports from Venezuela and Iran, as it believes that a Biden administration would ease the sanctions that currently restrict oil exports from these countries to India.

The EU meanwhile struck a major trade deal with Beijing during the final days of 2020 despite all the rhetoric surrounding CBAM and reservations expressed by Biden’s energy team. It will give European companies greater access to Chinese markets.

EU’s desire to make financial gains through a trade deal with China, despite the latter’s active involvement in the growth of fossil fuel market in Asia and Africa, shows the EU’s hypocrisy when it comes to walking the talk on CO2 emissions. It makes their CBAM hypocritical and selective policy that has turned a blind eye to the largest consumer of fossil fuels in the world.

Given the complexity of the fossil fuel trade relationships, the West’s defiant stand to reduce fossil fuel consumption, and EU’s surprising decision to make a significant trade deal with the biggest fossil fuel consumer China, it is difficult to predict the impact of CBAM and the Clean Energy plan on the overall trade relationships.

The CBAM will likely cause industry-level adjustments in major fossil fuel countries like India, which may eventually lead to compromised growth and prolongation of the deadlines to achieve developmental targets. It will eventually impact the consumers and the economy which is already reeling under the impact of COVID-19 lockdown.

Carbon imperialism, geopolitical tensions, and trade relationships

Besides the direct energy impact and subsequent disruption to the economy, EU and Biden’s carbon tax moves may also pave way for geopolitical tensions. India, for example, is a crucial ally for the U.S. in Asia, and the former may view these carbon taxes as a disruptive element in its relationship with the West.

The CBAM and similar taxes from the Biden administration may alienate developing countries like India and make them increase their trade relationships with global fossil fuel giants like China. In fact, China is already the biggest fossil fuel enabler, building coal plants in Africa and Asia. Despite the border issues, India may look at China as a more favourable trade partner, should the carbon taxes turn out to be disruptive. China is India’s second biggest export market, the US being the number one. But if carbon taxes kick in, things may change. Even the border scuffle in 2020 did not deter Indian exports to China which went up by 16%.

India has always been against the imposition of tough carbon laws. In 2017, the Chief Economic Advisor to the India’s Prime Minister, Arvind Subramaniam, slammed the Western powers for their restrictive energy policies that they were trying to impose on developing countries like India. He called it a form of “Green Imperialism”, where the Western powers like the U.S. and the EU were trying to exert economic control over the country by trying to restrict fossil fuel use which has been acting as India’s economic lifeline. 

With the advent of the CBAM, the fears expressed by India’s former economic advisor is becoming a reality. But India in all likelihood will not allow the CBAM to burden its economy. Speaking at an event this week, India’s Home Minister Amit Shah said,“the coal sector will be the largest contributor to India’s ambition of being a $5 trillion economy.” He added that State run and private firms will invest around Rs 4 trillion in India’s coal sector.