In the broader context, India is exploring the implementation of a Green Credit System, complementing its carbon market. The Green Credit System introduces a mechanism for individuals and businesses to earn Green Credits through eco-conscious actions.
By Nidhi Mehra
India and the European Union (EU) find themselves in a nuanced standoff concerning the imposition of a carbon tax and the EU's Carbon Border Adjustment Mechanism (CBAM) on India, a move perceived as a double penalty. Finance Minister Nirmala Sitharaman voiced India's disapproval of CBAM, underlining the country's shared commitment with the EU to transition toward greener industries and investments in sustainable assets. Penalizing India through CBAM during this transition appears inequitable, given the efforts both parties are making to adopt eco-friendly practices.
Assessing CBAM's Impact on Steel Exports to Europe
The impact of CBAM on India's steel exports to Europe, ranging from 15% to 40%, is a concern. Icra, a credit rating agency, projects this impact from 2026 to 2034, with the EU implementing CBAM from October 1, 2023. The mechanism targets various sectors, including steel, aluminium, cement, hydrogen, electricity, and fertilizer, aiming to tax embedded carbon imports.
India has sought exemption for its MSMEs from the EU's carbon tax, foreseeing its adverse effects on the domestic industry in specific sectors. The EU's carbon tax is set to begin from October 1, 2023. According to GTRI, CBAM could translate into a 20-35% tax on select imports into the EU, starting January 1, 2026.
Green Credit System in India. Image @ India CSR
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A Commitment to Sustainability and Policy Alignment
In response, India has initiated a National Steering Committee to develop a carbon market, showcasing the nation's commitment to addressing climate change and environmental sustainability. However, it's essential to align the carbon market's policy objectives with the chosen instrument for implementation. Economic theory offers two approaches to internalize externalities: the carbon tax route and the market mechanism route. India already imposes implicit carbon taxes on various forms of fossil fuels, necessitating the alignment of these taxes with the carbon market's introduction.
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Key Considerations for the Success of Carbon Market
The Indian carbon market's success hinges on several critical considerations, including the simplification of rules, allocation of emissions allowances, stimulating demand for carbon credits, regulatory clarity concerning carbon derivatives, and addressing fungibility issues both domestically and internationally.
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Integrating Green Credit System, Carbon Market and Sustainability
In the broader context, India is exploring the implementation of a Green Credit System, complementing its carbon market. The Green Credit System introduces a mechanism for individuals and businesses to earn Green Credits through eco-conscious actions. These credits, representing real environmental impact, could be traded within the carbon market, further incentivizing carbon offsetting and sustainability efforts.
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Aligning Green Credit System and Carbon Market
Aligning the Green Credit System with the carbon market will create a holistic approach to carbon mitigation and environmental sustainability, setting a global example. India's journey toward establishing a carbon market presents both challenges and opportunities. Through careful design and alignment with existing policies, India can set the stage for a successful carbon market that not only reduces emissions but also promotes a greener and more sustainable future for all.
(Author: Nidhi Mehra, Co-founder, MyPlan8)
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