The Carbon Border Adjustment Mechanism (CBAM) is a policy introduced by the European Union (EU) to address carbon leakage and promote fair competition in global trade. It seeks to ensure that imported goods are subject to carbon costs similar to those faced by EU producers, aligning trade with climate objectives. While CBAM aims to support the transition to a low-carbon economy, it has sparked debates about its implications for global trade, developing nations, and international climate cooperation.
This blog explores CBAM’s objectives, workings, and implications, with a focus on its impact on India and measures to address the challenges it poses.
About Carbon Border Adjustment Mechanism
What is CBAM?
The CBAM is a climate policy initiative aimed at aligning the carbon cost of imported goods with those produced in the EU. It ensures that industries operating under strict EU climate regulations do not lose competitiveness to foreign producers in countries with less stringent carbon policies.
Objectives of CBAM
Prevent Carbon Leakage: Discourage industries from relocating to countries with lax climate regulations.
Promote Global Climate Action: Encourage trading partners to adopt carbon pricing mechanisms.
Support EU Climate Goals: Align with the EU Emissions Trading System (EU ETS) to achieve net-zero emissions by 2050.
Ensure Fair Competition: Protect EU industries from unfair competition due to differing environmental regulations.
Sectors Covered
CBAM initially applies to carbon-intensive industries:
Cement
Iron and Steel
Aluminum
Fertilizers
Electricity
Exemptions and Adjustments
Exemptions: Countries with equivalent carbon pricing mechanisms or robust climate policies may receive exemptions.
Adjustments: The mechanism is designed to comply with World Trade Organization (WTO) rules to avoid discrimination against non-EU producers.
How Does the Carbon Border Adjustment Mechanism Work?
The CBAM operates through a phased and structured approach:
Determination of Carbon Footprint: Importers must calculate the carbon emissions embedded in their products.
CBAM Certificates: Importers buy certificates equal to the embedded emissions in their goods.
Price Alignment: The cost of CBAM certificates matches the EU Emissions Trading System (EU ETS) carbon price.
Reporting Obligations:
2023–2025: A transitional phase requiring importers to report emissions without financial payments.
Post-2026: Full implementation where payment for CBAM certificates becomes mandatory.
Adjustment for Existing Taxes: Any carbon tax already paid in the exporting country is deducted from the CBAM cost.
Arguments in Favour of CBAM
Combatting Carbon Leakage: CBAM prevents businesses from relocating to countries with weaker climate rules, promoting fair competition.
Encouraging Global Climate Action: It incentivizes countries to adopt stronger climate policies, fostering global cooperation on climate change.
Revenue for Green Projects: CBAM revenue can fund climate initiatives in developing countries, supporting their green transition.
Leveling the Playing Field: It ensures countries with stricter environmental policies aren’t undercut by cheaper imports from nations with weaker standards.
Promoting Clean Tech Innovation: CBAM drives innovation in clean technologies by encouraging industries to reduce their carbon footprint.
Arguments Against CBAM
Trade Discrimination: CBAM could be seen as a protectionist measure, favoring EU industries over those in developing countries like India. This could lead to trade barriers and unfair competition in global markets.
Economic Burden on Developing Nations: For countries like India, CBAM could increase costs for key industries (e.g., steel, cement), reducing their global competitiveness and affecting economic growth.
Climate Finance Gap: India has long called for more climate finance from developed nations. CBAM could divert attention from providing financial support to developing nations for a greener transition.
Measurement Challenges: Accurately calculating carbon content in products can be complex, leading to inefficiencies and disputes between trading nations over compliance.
Risk of Trade Conflicts: CBAM may trigger retaliation from affected countries, leading to trade wars that disrupt global trade and harm both developed and developing economies.
Ignoring National Context: CBAM doesn’t account for the unique challenges of developing nations, such as dependence on fossil fuels and the need for economic growth, potentially hindering their development goals.
Impact on India
Export Challenges: India, a major exporter of steel, aluminum, and fertilizers to the EU, faces increased costs due to CBAM compliance. Example: India’s steel exports to the EU in 2022 were valued at over $3 billion. CBAM could significantly impact this trade if compliance costs rise.
Competitiveness Loss: High-carbon sectors in India risk losing market share to EU producers.
Economic Implications: The added cost burden may discourage exports, impacting India’s economic growth and employment in affected industries.
Increased Pressure to Decarbonize: CBAM incentivizes India to adopt stricter environmental regulations and carbon pricing policies.
Measures to Deal with CBAM's Impact
Policy Reforms:
Introduce a domestic carbon pricing mechanism to align with global standards.
Provide financial incentives for adopting low-carbon technologies.
Example: India’s National Green Hydrogen Mission can reduce dependency on fossil fuels in the steel and aluminum sectors, helping mitigate CBAM’s impact.
Technological Upgrades:
Invest in renewable energy and energy-efficient manufacturing processes.
Promote carbon capture, utilization, and storage (CCUS) technologies.
International Negotiations:
Advocate for fair exemptions for developing countries under CBAM.
Collaborate with other nations to influence global carbon pricing discussions.
Capacity Building:
Educate exporters about CBAM requirements.
Establish systems to monitor and reduce carbon footprints.
Conclusion
The Carbon Border Adjustment Mechanism (CBAM) poses challenges for India’s exporters but also offers opportunities to align with global climate goals. By adopting sustainable practices, accelerating decarbonization, and leveraging initiatives like the National Green Hydrogen Mission, India can turn CBAM into a catalyst for green industrial transformation.With strategic policies and international cooperation, India can safeguard its trade interests, enhance competitiveness, and contribute meaningfully to global climate action. CBAM is both a challenge and an opportunity for India to lead in the transition to a sustainable, low-carbon future.
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