Context: The Minister of Commerce and Industry has said that the CBAM is “unfair” as carbon could not be priced the same in India and Europe. 

What is CBAM?

• As part of a plan to decarbonize its economy by 2050, the European Union introduced a carbon border adjustment mechanism (CBAM).

• It is a duty on imports based on the amount of carbon emissions resulting from the production of the product in question. 

• Its primary objective is to avert ‘carbon leakage’. It refers to a phenomenon where a EU manufacturer moves carbon-intensive production to countries outside the region with less stringent climate policies.

• In other words, replace EU-manufactured products with more carbon-intensive imports.

Need for the CBAM

• The idea here is to avert the possibility of carbon leakage alongside encouraging producers in non-EU countries to green their manufacturing processes. 

• To ensure a level playing field between imports and EU products. 

• This would also form part of the continent’s broader European Green Deal which endeavours to achieve 55% reduction in carbon emissions compared to 1990 levels by 2030 and become a climate neutral continent by 2050.

Latest developments

• On 1 October 2023, the CBAM entered into application in its transitional phase, with the first reporting period for importers ending 31 January 2024.

• The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. 

Challenges for India

• Acting as a trade barrier: With the CBAM in effect from 1 October, India’s exports of carbon-laden products to Europe—mainly aluminium and iron-and-steel—have been burdened with green reporting rules which is a trade barrier in itself.

• Uncompetitive exports: India’s products have a higher carbon intensity than its European counterparts, the carbon tariffs imposed will be proportionally higher making Indian exports substantially uncompetitive.

• EU being India’s third largest trade partner and given the latter’s projected growth trajectories, the size of exports (including in the CBAM sectors) will invariably rise.

• May push for similar regulations worldwide: International climate policies (including CBAM) will compel other countries to impose similar regulation eventually translating to ‘a significant impact’ on India’s trading relationships and balance of payments.

India at a disadvantageous position

• In terms of carbon intensity, the carbon intensity of Indian products is significantly higher than that of the EU and many other countries.

• This is because coal dominates the overall energy consumption. Hence, higher emissions would translate to higher carbon tariffs to be paid to the EU.

• The proportion of coal-fired power in India is close to 75%, which is much higher than the EU (15%) and the global average (36%).

• Moreover, India has no domestic carbon pricing scheme in place which poses a greater risk to export competitiveness.

• Other countries with such a system in place might have to pay less carbon tax or get exemptions.

Road Ahead

• Transparency and non-discrimination should remain key principles of any global understanding, and that should also ensure that carbon-related measures do not unnecessarily restrict trade. 

• It remains to be seen, however, to what degree the CBAM will succeed in incentivizing deeper decarbonization and whether it will spur a virtuous policy cycle among global trading partners or, on the contrary, if it will start another round of trade wars.