Carbon Emission and the Road to COP 30

The journey towards COP 30 in Belem highlights significant discussions on carbon emissions and global efforts to decarbonize industries through market-based approaches. Key strategies involve pricing carbon emissions and recycling revenue for mitigation and adaptation finance needs.

Carbon Pricing Mechanisms and Challenges

• Carbon Leakage: The unilateral application of carbon pricing may lead to 'carbon leakage,' where emissions are transferred to countries with looser regulations.
• Carbon Border Adjustment Mechanism (CBAM): Introduced by the EU and UK to curtail carbon leakage and protect domestic industries. However, it faces limitations such as: 
  • Resource reshuffling and insufficient product coverage.
  • Complex value chains and impacts on downstream products.
  • Implementation issues due to lack of reporting frameworks in exporting countries.

Issues with CBAM Implementation

• Recognition of Non-pricing Measures: CBAM credits only explicit carbon prices, excluding non-pricing methods like voluntary carbon offsetting and fuel taxes.
• Discrimination Under GATT: Non-recognition of non-carbon pricing measures contradicts GATT (WTO) provisions.
• Varying Carbon Intensity Metrics: Differences in methodologies and reporting systems across nations challenge international comparability.
• International Law Contravention: CBAM opposes UNFCCC and WTO tenets, disadvantaging low-income countries by shifting decarbonization burdens.

India's Response to CBAM

• Export Impact: India's exports, especially in iron and steel sectors, are vulnerable to CBAM, accounting for 90% of its exposure.
• Carbon Pricing Framework: India is progressing towards a structured carbon pricing framework and an Emissions Trading System (ETS).
• Carbon Credit Trading Scheme (CCTS): Launched in July 2024, it includes: 
  • A compliance mechanism for industrial entities.
  • An offset mechanism encouraging voluntary participation.
• Voluntary Carbon Credits: Eight crediting methodologies approved, including Renewable Energy and Green Hydrogen.
• Integration with EU's CBAM: Expected to address double taxation concerns for Indian exporters.

Future Prospects and Challenges

• Indian Carbon Market Development: Defining carbon credits as an asset class to attract investments.
• Alignment with International Standards: A robust MRV framework is crucial to integrate with global markets and prevent future litigations.
• COP 30's Role: A platform for resolving differences between developed and developing nations over carbon adjustment challenges.
• Strategic Opportunities: Developed countries should leverage CBAM for technology transfer and financial assistance to developing nations.

As we approach COP 30, it is imperative to find common ground on carbon adjustment and implement a consistent strategy to channel CBAM revenue towards technology transfer and financial assistance.

The information provided reflects the personal views of the writer, who is a commissioner of income tax with expertise in environmental taxation and climate finance.