The Carbon Border Adjustment Mechanism: Implications for India and the Global Market

What is the European Union's Carbon Border Adjustment Mechanism (CBAM)?

The European Union's Carbon Border Adjustment Mechanism (CBAM) is a strategic policy aimed at imposing a carbon price on specific imported goods. Its primary goal is to prevent carbon leakage and promote cleaner production practices. This mechanism functions similarly to a carbon tax, targeting imports such as iron, steel, cement, aluminium, fertilisers, and electricity.

When will the CBAM take effect, and what are its preliminary actions?

The full implementation of the CBAM is scheduled for January 1, 2026. However, starting from October 1 of the current year, companies operating in carbon-intensive sectors are required to begin complying with certain regulations. This includes the obligation to report their carbon emissions to the EU.

How might CBAM affect companies in India's carbon-intensive sectors?

Indian companies, particularly in sectors like steel, cement, fertilisers, aluminium, and hydrocarbon production, will need to provide detailed disclosures of their carbon emissions data to the EU. This requirement may lead to increased export duties, estimated to be between 20-35%, which could significantly affect India's trade competitiveness.

What concerns does India have regarding the CBAM?

India's concerns surrounding the CBAM are multifaceted. They include the potential for disruptions in trade flows, heightened pressure on domestic industries to reduce emissions, and the risk of trade conflicts stemming from the implementation of the CBAM.

How could the CBAM positively influence India?

Despite the challenges posed by the CBAM, there are potential positive outcomes. The mechanism could motivate Indian industries to adopt cleaner technologies and practices, paving the way for the development of domestic carbon pricing mechanisms.

What steps has India taken in anticipation of the CBAM's impact?

In preparation for the CBAM's effects, India is enhancing its renewable energy capabilities and implementing policy and regulatory changes aimed at improving energy efficiency. Additionally, the country is promoting carbon credits and engaging in diplomatic efforts with the EU to secure favourable terms.

What is the potential financial impact of the CBAM on India?

Estimates suggest that the CBAM could impose costs of up to US$ 8 billion on India's exports to the EU, with the steel and cement sectors being particularly affected.

What broader implications does the CBAM have on global climate change efforts?

The CBAM highlights the necessity for a balanced approach to trade and environmental objectives. It advocates for a fair and inclusive transition that does not rely solely on taxation but also promotes global cooperation and cleaner production practices.