Carbon Border Adjustment Mechanisms (CBAM)

Why in the News?

BRICS group has condemned and rejected the European Union’s Carbon Border Adjustment Mechanism (CBAM) and other similar climate-linked trade measures.

What Is the Carbon Border Adjustment Mechanism (CBAM)?

• Overview: It is a climate-related import duty imposed by the European Union on goods whose production involves higher carbon emissions than what is permitted in the EU.
• Policy Framework: CBAM is part of the EU’s “Fit for 55” climate package, aimed at reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.
• Scope of Coverage: The policy requires importers to declare the volume and embedded carbon emissions of certain goods, such as steel, aluminium, cement, fertiliser, hydrogen, and electricity.
• Compliance Mechanism: To offset these emissions, EU importers must surrender CBAM certificates, priced based on the EU Emissions Trading System (ETS).
• Carbon Price Adjustment: If a non-EU producer has already paid a carbon price in their country, that amount can be deducted from the CBAM charge.
• Implementation Timeline: The transitional phase of CBAM is underway from 2023 to 2025, and the definitive regime begins on January 1, 2026.

Issues with CBAM:

• Trade Discrimination Concerns: Developing countries, including India and China, argue that CBAM imposes unilateral, punitive, and discriminatory trade restrictions under the guise of environmental protection.
• Violation of Climate Agreements: It is viewed as a violation of Paris Agreement, which upholds the principle of common but differentiated responsibilities.
• Neglect of Historical Emissions: Countries in the Global South contend that climate-related trade tools like CBAM ignore historical emissions and disproportionately impact countries still reliant on carbon-intensive development.

Implications of CBAM for India:

• Impact on Exports: Indian exports, particularly in iron, steel, aluminium, and cement, will face additional scrutiny and carbon charges under CBAM, reducing their competitiveness.
• Carbon Taxation Timeline: From January 1, 2026, carbon taxes will be levied on each shipment to the EU in specific sectors, ranging from 19.8% to 52.7% in potential carbon levies.
• High Carbon Intensity Risk: India’s high carbon intensity, primarily due to its 75% dependence on coal, makes its products more vulnerable to CBAM tariffs.