Climate change has become the biggest cause of concern across the world. Considering the severity of the current situation, major economies of the world have come together to combat global warming and control their carbon footprint.
In 2015, 196 parties including European Union (EU) signed the treaty on climate change. While Denmark, Sweden, and Chile have already formed a framework to limit global warming below 1.5 degrees Celsius, the UK, Norway, France, and New Zealand have targeted to reach net zero emissions by 2050. UAE has also increased its target of reducing greenhouse gas emissions by 31% by 2030 from its earlier target of 23.5% in support of the objectives of the UAE Net Zero by 2050 Strategic Initiative.
The EU has additionally introduced stringent measures to control carbon emissions such as the carbon border tax which may alter international trade entirely.
Carbon Border Tax by European Union and its Impact
EU has introduced Carbon Border Adjustment Mechanism (CBAM) to stop ‘Carbon Leakage’ which will come into force from 1st October 2023. Carbon leakage occurs when companies based in the EU move carbon-intensive production to countries where less stringent climate policies are in place than in the EU, or when EU products get replaced by more carbon-intensive imports. The other reason for implementing CBAM is to provide a level playing field to local businesses by taxing imports. European industries that have already invested in reducing their carbon footprint benefit as the tax reduces competition from carbon-intensive imports. However, it may work unfavorably for many countries as imported items will cost more in the EU’s local market, leading to a reduction in the demand for these items.
On the other hand, CBAM will prevent the shifting of emissions from one region to another and may influence non-EU countries to adopt cleaner production practices and align with the EU’s climate goals . While its full impact is yet to be seen, the tax has the potential to foster a more sustainable and equitable future.
India Pays the Price for Carbon Emissions
Indian exports are likely to be impacted adversely due to the implementation of CBAM as it may cost more to export goods to EU countries. According to an internal assessment by the commerce ministry, carbon border tax (CBT) is anticipated to impact USD 8 Bn worth of Indian exports, especially in the steel and aluminum sector. This may lead to challenges in trade relationships between the EU and India, potentially impacting economic growth and employment.
The positive side of the story is that CBAM is likely to provide a fair and competitive environment to Indian industries that have already made efforts to reduce their carbon footprint by reducing competition from carbon-intensive imports. Additionally, the mechanism may influence carbon-intensive industries in India to opt for sustainable technologies and reduce their carbon emissions, helping India to achieve its target of carbon neutrality.
Carbon Border Tax and its Impact on Indian Real Estate
The carbon border tax targets carbon-intensive industries primarily, but its indirect impact is imminent on the Indian real estate sector. The tax could influence government policies and regulations related to sustainability and environmental standards in the real estate sector to align with global climate goals. This may include stricter energy efficiency norms, green building certifications, and incentives for sustainable construction practices.
Developers, investors and other stakeholders are increasingly focusing on ESG factors in their decisions and this is seen in the strong sustainability focus and commitment to adopting green building practices, use renewable and efficient sources of energy, and sustainable building designs that align with international standards and market expectations. This in turn, may lead to an increase in demand for real estate projects that demonstrate green features and certifications. Developers who prioritize sustainability can position themselves as leaders in the evolving real estate landscape. Energy-efficient buildings, green spaces, and sustainable infrastructure can attract environmentally conscious buyers and tenants.
Outlook
India is a developing nation and has heavy dependence on non-renewable energy to fulfill its needs. It has already incentivized the production of green energy but that is not enough. The implementation of a carbon emission tax may reduce carbon footprint, but a strong framework is needed for it to work efficiently.
Additionally, India needs an efficient carbon trading mechanism to reduce the burden of carbon border tax on exports as the carbon tax paid by a firm in the home country is adjusted while paying CBT in the EU. In the absence of this mechanism, Indian exporters may have to pay taxes twice which will increase the production cost.
Overall, India must assess the potential challenges and opportunities posed by the tax and explore ways to align with global climate goals while protecting its economic interests, or in other words, find a balance between growth and carbon neutrality.