Carbon Border Adjustment Mechanism: Implications for Indian Exports

What is CBAM and When Will It Apply?

The Carbon Border Adjustment Mechanism (CBAM) is a carbon tax introduced by the European Union on imports of carbon-intensive goods such as steel, aluminium, cement, fertilisers, electricity, and hydrogen. Full implementation is set for January 1, 2026, following a transition period that commenced on October 1, 2023. This period requires exporters to report factory-level emissions data.

Why is the EU Introducing CBAM?

The EU aims to implement CBAM for several crucial reasons:

• Prevent carbon leakage, where companies relocate production to nations with looser climate regulations.
• Ensure that imported goods face equal carbon costs compared to EU-produced goods.
• Protect domestic EU industries from cheaper, high-emission imports.
• Encourage cleaner production practices globally by assigning a cost to carbon emissions.

Which Indian Exports Are Most at Risk?

Indian exports of steel, aluminium, cement, urea, electricity, and iron ore/pellets are particularly vulnerable. The CBAM tax burden is calculated as a percentage of the product's export price, influenced by the CO₂ emitted during production. Estimated CBAM tax burdens for Indian exports include:

• Cement: Up to 90% of export value.
• Iron ore/pellets: 52.7%.
• Steel (blast furnace route): 39.6%.
• Aluminium: 21.9%.
• Urea: 19.8%.
• Electricity: 40%.

These significant figures imply that CBAM could render Indian goods considerably more expensive and less competitive in EU markets.

How is the Tax Calculated?

The EU imposes a charge of €65 (approximately ₹73.13) per tonne of CO₂ emitted. If the exporting country lacks a carbon tax or emissions pricing system, the exporter must pay the full amount. Countries with existing carbon taxes receive partial credit under CBAM, reducing their payable amount.

Can Indian Exporters Pay CBAM to the Indian Government?

No, Indian exporters are required to pay the tax directly to EU authorities under current regulations. India can only receive CBAM adjustments if it implements a formal domestic carbon pricing system, such as a carbon market or tax.

Will CBAM Violate India’s Trade Rights Under FTA or WTO?

If CBAM is enforced while India is negotiating Free Trade Agreements (FTAs) with the EU or UK, India may pursue adjustments or exemptions. At the WTO, India could raise concerns regarding non-tariff barriers and advocate for special considerations for developing economies.

How Can Indian Exporters Stay Competitive Despite CBAM?

To maintain competitiveness, Indian exporters should adopt a dual strategy:

• Emphasize cleaner technologies like electric arc furnaces, renewable energy, or energy-efficient methods to minimize emissions.
• Engage in EU supply chains where intermediate goods incur lower tax burdens.

Additionally, India can explore domestic carbon pricing to gain CBAM credits and promote clean production through industry policy reforms.

Will Developing Countries Be Treated Differently?

Currently, no special provisions are granted to developing nations under CBAM. The EU focuses solely on the actual emissions of imported goods. While the IMF has suggested lower carbon prices for low-income countries, the EU has not incorporated such relief in CBAM regulations.

What Role Can Green Hydrogen Play?

Green hydrogen can significantly reduce emissions in the steel and chemical sectors, aiding Indian exporters in minimizing CBAM liabilities in the future. However, ongoing green hydrogen projects in India are still developing and may not offer immediate relief before 2026. Investments in hydrogen hubs, renewable integration, and low-emission technologies are essential for future success.

What Should India’s Long-Term Response Be?

India should focus on the following strategies:

• Advocate for climate-equal trade frameworks in global negotiations.
• Develop a domestic carbon pricing policy.
• Align with global green manufacturing standards.
• Ensure FTAs include climate tax safeguards and technical transition support.

Frequently Asked Questions (FAQs)

Q1. What is the main goal of CBAM?
Answer: The primary goal of CBAM is to prevent carbon leakage by ensuring that imported goods face the same carbon costs as EU-produced goods, thereby protecting domestic industries and promoting cleaner production practices.

Q2. How will CBAM impact Indian exports?
Answer: CBAM may significantly increase costs for Indian exports like steel and cement, making them less competitive in the EU market due to high tax burdens based on emissions data.

Q3. Can India negotiate exemptions from CBAM?
Answer: Yes, India can negotiate for adjustments or exemptions under current FTAs if CBAM is enforced, and raise concerns at the WTO regarding its impact on developing economies.

Q4. What technologies can help Indian exporters reduce emissions?
Answer: Technologies like electric arc furnaces and renewable energy solutions can help Indian exporters reduce their carbon emissions, thus lowering their CBAM liabilities.

Q5. Will developing countries receive special treatment under CBAM?
Answer: Currently, no special treatment is provided for developing countries under CBAM, as the EU focuses on actual emissions without offering exemptions for lower-income nations.