Strategies for combating challenges of EU’s carbon tax plans

Prof. D. Mukhopadhyay
The European Union (EU) is at the forefront of global efforts to combat climate change. As part of its commitment to reducing greenhouse gas emissions and promoting sustainable development, the EU has implemented various policies, including plans for a carbon tax. The EU’s Carbon Tax Plans (ECTPs) aim to internationalize the environmental costs involved with carbon emissions by imposing a price on carbon-intensive products. The tax would contribute to the EU’s overall climate goals to promote a more sustainable global economy. Many developing and emerging economies, including India, depend on the import of minerals to fuel their industrial growth and infrastructure development. These countries, often rich in natural resources, lack the infrastructure, technology, or financial means to exploit these inputs. Consequently, they rely on exporting raw materials to more advanced economies for processing and value addition. The carbon tax would increase the cost of production, leading to reduced foreign direct investment, lower economic growth, and potential job losses in these countries, besides creating trade disparities as the burden falls disproportionately on countries with less advanced industries and limited access to clean technologies. ECTPs aim to internationalize the environmental costs associated with carbon emissions, which may increase the cost of these imported materials, resulting in higher input costs impacting competitiveness in the global market. A study by the Center for European Policy Studies revealed that the EU’s carbon border adjustment mechanism (CBAM), a part of the carbon tax plans, could increase the cost of steel imports by 15 % attributed with a cascading effect on various Indian industries and other countries. The carbon taxes put these countries at a disadvantage, as they may struggle to meet the EU’s emissions standards scheduled to be come into force from January 202. It is a well known hypothesis that India is in a phase of rapid economic growth and the ECTPs could pose challenges to this trajectory. The increased costs of imported minerals can impact on key sectors driving India’s economic growth, such as manufacturing, infrastructure development, and energy generation resulting, in reduced investments, employment losses, and hindered economic progress. A study by the World Bank projected that a unilateral carbon tax imposed by major economies, including the EU, could lead to a decline in India’s GDP growth by 2.8% by 2050. This showcases the potential long-term economic consequences that emerging economies and India may face as a result of the carbon tax incidence.
The cost implications for India’s exports and imports under the carbon tax regime is likely to be adverse. The imposition of a carbon tax could impact on the competitiveness of industries, increase the cost of imports, and affect trade relations between India and the EU. India relies on imported minerals, such as coal, oil, and natural gas, for energy generation and industrial processes, The increased cost of these imports due to the carbon tax can impact on the overall production cost . If the EU imposes a carbon border adjustment mechanism (CBAM) on steel imports, it would increase the cost of imported steel for the Indian industries, leading to a cascading effect on sectors, such as automotive, construction, and manufacturing, where steel is a critical input and increased cost of imports due to the carbon tax would affect the competitiveness of the Indian products in EU market. If Indian exporters are unable to absorb the additional costs such as carbon tax, it may lead to higher prices for their goods compared to competitors from countries that do not face similar carbon-related charges, which potentially result in a loss of market share for exporters in EU.
Engaging in bilateral negotiations with the EU to address concerns related to the ECTPs can help mitigate trade disruptions and find mutually beneficial solutions. India would require significant investments in clean technologies and renewable energy infrastructure, to combat competitive disadvantages posed by the ECTPs for which potential sources of financing could be budgetary allocation, international climate finance, Green Climate Fund, established under the United Nations Framework Convention on Climate Change (UNFCCC), multilateral development banks, such as the World Bank and Asian Development Bank (ADB), offer financing for sustainable development projects, including those related to clean energy and climate change mitigation. Besides India, several countries, such as China, Russia, Australia, Saudi Arabia, Brazil, Indonesia, South Africa etc. may face competitive disadvantages under the European Union’s (EU) carbon tax plans regime. To be specific, China, the world’s largest emitter of carbon dioxide, Russia , a major exporter of fossil fuels, including oil and natural gas. Australia, a major exporter of coal and natural gas, may be a casualty of the EU’s Carbon Tax Plans. For Brazil, taxes can increase the costs of agricultural inputs and impact on the price competitiveness of its agricultural products. As for Kingdom of Saudi Arabia, is concerned taxes may increase costs for its oil industry and affect its economic position in the global oil market. Similarly, South Africa , a major exporter of coal, reliant on coal-fired power generation may face an upward trend in costs that could affect the competitiveness of energy exports. Professional Accountants have a key role in measuring and reporting the carbon tax weighted cost of production of goods and services , matching cost with operational revenue and financial reporting. For instance, Cost and Management Accountants(CMAs) can do cost measurement , cost analysis, and involvement in strategic decision-making. Based on cost analysis, they can develop strategies and recommend adopting methodologies for identifying energy-efficient processes, optimizing resource utilization, and exploring alternative suppliers of materials besides conducting cost-benefit analyses, assessing return on investment, and determining the financial viability of such projects.
By identifying cost-effective investments for sustainability, they can help businesses reduce carbon emissions costs, improve efficiency, and offset the impact of the carbon tax on product pricing, besides developing key performance indicators (KPIs) to monitor the environmental performance of the business in response to the carbon tax implementation, provide insights into the effectiveness of mitigation strategies, facilitate decision-making, and support transparency in environmental disclosures in terms of the Environmental Management Accounting (EMA) methodologies. Keeping in view the long-term impact of the carbon tax, CMAs can assist in formulating sustainable business strategies that address both eliminating irrelevant costs and achieving environmental protection objectives. Similarly,the Chartered Accountants(CAs)/Certified Public Accountants(CPAs) can play a crucial role in financial reporting and auditing the impact of the European Union’s (EU) Carbon Tax plans on the financial statements of the auditee companies. It need not be mentioned that they possess a deep understanding of accounting standards and regulations by which they can help companies interpret and apply relevant accounting standards, such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), in relation to the financial impact of the carbon tax. CAs/CPAs can help companies identify and quantify the direct and indirect financial effects of carbon tax on various financial statement elements, such as income, expenses, assets, liabilities and finally on the net-worth and guide the companies in meeting the disclosure requirements related to the EU’s carbon tax in financial statements , assess effectiveness of a company’s internal controls related to the financial reporting of the carbon tax impacts, advise companies on tax planning strategies to minimize the financial impact of the carbon tax and can contribute to accurate and reliable financial reporting on the impact of the EU’s carbon tax plans on the financial health of the concerned organisation.
Although ECTPs are likely to be an unavoidable element of the cost of production, the ECPT challenges present an opportunity for India and other countries to accelerate their transition to clean technologies and renewable energy sources, as, ECTPs could serve as an impetus for investing more in renewable energy infrastructure, energy efficiency systems and sustainability. Empirical research can find out how the carbon taxes influence the development trajectory of these economies and this can help the government in capital expenditure decision making. By participating in international forums, such as the United Nations Framework Convention on Climate Change (UNFCCC), India can collaborate with other nations to shape global climate policies that are fair and inclusive. Collaboration with developed countries and international organizations can help India access cleaner technologies and acquire the necessary expertise to mitigate the impact of the carbon tax and can focus on diversifying her energy mix to reduce dependence on carbon-intensive inputs by promoting renewable energy sources, such as solar, wind, and hydroelectric power.
The G20 is an international forum consisting of 19 countries and the European Union, representing the world’s major economies. While the G20 Presidency provides a platform for India to address global issues and advocate for its interests, it is important to note that the G20 operates on a consensus-based decision-making process, and any leverage or influence India can exert on specific policies, such as the ECTPs would depend on various factors such as diplomatic negotiations, coalition building, economic and trade considerations , advocacy for developing economies. It is worth mentioning the effectiveness of India’s leverage within the G20 and her ability to influence the ECTPs would depend on various factors, including the willingness of other member countries to engage in constructive dialogue and reach consensus. Additionally, policy decisions and negotiations may have evolved through mutual understanding and cooperation.
(The author is a Bangalore-based Educationist and Management Scientist)