CBAM stands for Carbon Border Adjustment Mechanism, a policy proposed by the European Union (EU) aimed at imposing a carbon tax on specific imports into the EU.
The introduction of CBAM is necessary to tackle carbon leakage, a situation where industries relocate to regions with less stringent environmental regulations, resulting in an increase in global emissions. This mechanism ensures that imports into the EU align with the EU’s climate objectives.
CBAM is set to commence on January 1, 2026.
Initially, CBAM targets sectors such as steel, aluminium, cement, fertilizer, hydrogen, and electricity. However, it is anticipated that the mechanism will eventually extend to encompass all imports into the EU.
CBAM could potentially increase the cost of India's exports to the EU by 20-35%, which would significantly impact industries that heavily depend on exports to the EU.
India is contemplating a two-pronged approach: firstly, resisting CBAM in multilateral forums, and secondly, considering the implementation of a reciprocal tax on exports to the EU.
The revenue generated from this reciprocal tax could be utilized to enhance environmentally friendly processes, which may eventually lead to reduced taxes in the future.
India’s strategic response could motivate other exporting nations with carbon credit markets to adopt similar measures.
CBAM is regarded as a non-tariff barrier and may influence zero-duty Free Trade Agreements (FTAs). Additionally, it presents complexities when managing global firm-level data.
These FAQs offer a detailed overview of CBAM and its implications, alongside India’s strategic responses. Stay prepared for Civil Services with SRIRAM’s Classes.
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