How CBAM and EUDR are Shaping India-EU Trade Relations

Understanding the Carbon Border Adjustment Mechanism (CBAM)

The European Union's Carbon Border Adjustment Mechanism (CBAM) represents a significant move to impose carbon tariffs on imports of carbon-intensive goods. This includes products such as cement, steel, and aluminum. The goal of CBAM is to combat "carbon leakage," a scenario where companies shift production to countries with laxer climate policies to evade carbon costs within the EU.

How CBAM Functions

• Targeting Carbon-Intensive Imports: The mechanism primarily focuses on goods like cement, steel, aluminum, fertilizers, electricity, and hydrogen.
• Calculating Embedded Emissions: Importers are required to report the carbon emissions embedded in their products.
• Applying a Carbon Price: Importers pay a price based on the EU's carbon market price, known as the Emissions Trading System.
• Phased Implementation: The mechanism commenced in October 2023 and is expected to be fully operational by January 2026.

Exploring the EU Deforestation Regulation (EUDR)

The EU Deforestation Regulation (EUDR) aims to ensure that products sold within the EU market are free from contributing to deforestation or forest degradation globally. This regulation applies to a variety of commodities, including soy, beef, palm oil, wood, cocoa, and coffee.

Mechanics of EUDR

• Comprehensive Commodity Coverage: The regulation targets products like soy, beef, palm oil, wood, cocoa, and coffee.
• Due Diligence Requirement: Companies must demonstrate their products are deforestation-free through rigorous due diligence and traceability systems.
• Penalties for Non-Compliance: Companies that fail to comply may face penalties, including potential bans on their products in the EU market.
• Implementation Date: The regulation will be effective from December 30, 2024.

India's Concerns with CBAM and EUDR

India perceives these measures as potential non-tariff barriers (NTBs) that could unfairly target its exports. These regulations are seen as protective measures that may lead to significant tariffs on Indian exports, potentially making them less competitive. Moreover, the due diligence requirements of EUDR could pose a challenge for Indian exporters, particularly small and medium-sized enterprises.

Implications for India-EU Trade

The introduction of CBAM and EUDR could hinder the ongoing free trade agreement negotiations between India and the EU. These policies might lead to a reduction in Indian exports to the EU, which is India's second-largest export market. Additionally, there is a risk of trade disputes between India and the EU, potentially escalating to the World Trade Organization (WTO).

Significance of the Issue

This situation underscores the growing tension between trade liberalization and environmental protection. The use of trade measures to achieve climate goals raises questions about their impact on developing countries. The resolution of this dispute could have significant implications for the future of global trade and environmental action.

EU's Perspective on CBAM and EUDR

The EU defends CBAM and EUDR as essential tools for achieving its climate objectives and ensuring a level playing field for its industries. The EU argues that these policies promote global climate action and responsible sourcing of products.

Potential Outcomes for India-EU Relations

Disagreements over these regulations could stall free trade agreement negotiations and potentially reduce Indian exports to the EU. The outcome of this debate will play a crucial role in shaping the future of India-EU trade relations, balancing trade, environmental concerns, and development goals.

Synopsis: The EU's CBAM and Deforestation Regulation initiatives have raised alarms in India, which views them as potential barriers to trade. While both regions acknowledge the importance of environmental protection, the debate highlights the intricate balance between trade, environmental objectives, and development in the global context.