The Carbon Border Adjustment Mechanism (CBAM) is a tax imposed on imports of goods from countries that do not have carbon pricing mechanisms in place. This initiative aims to prevent carbon leakage and promote cleaner production processes by imposing a carbon cost on imports.
CBAM officially began on October 1, focusing initially on carbon emissions reporting requirements for imports.
From 2023 to 2026, there will be a transition period where emissions reporting is mandatory. The actual tax component of CBAM is set to be enforced by the EU starting in 2026.
CBAM has significant implications for India, as it may impose a tax on its exports to the EU and UK. This is particularly concerning for sectors such as iron, steel, and aluminum, which are crucial to India’s economy, with exports valued at $8-$9 billion potentially becoming less competitive due to the carbon tax.
India has expressed its opposition to CBAM, challenging it at the World Trade Organization (WTO) on the grounds that it is discriminatory and violates the principle of common but differentiated responsibilities. The country is actively seeking ways to mitigate the impact on its exports, including exploring compensation for affected exporters.
In response to CBAM, India is contemplating various relief measures to maintain its competitiveness in the global market. This includes negotiating for longer transition periods and looking into mechanisms to offset the duties imposed by CBAM.
India's primary concern is that CBAM might undermine its trade interests, especially in sectors that are vital to its economy. It also argues that CBAM could counteract the objective of differentiated responsibilities among nations regarding environmental impact.
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