Why in the news?

  • An analysis by the European non-profit think tank Sandberg has revealed that Indian exporters of iron and steel to the European Union may face Carbon Border Adjustment Mechanism (CBAM) charges- the highest among all countries exporting similar products to the EU.

Carbon Border Adjustment Mechanism (CBAM)

  • What is it?:
    • Carbon Border Adjustment Mechanism (CBAM) is a key component of the European Union’s (EU) European Green Deal, aimed at preventing “carbon leakage” and ensuring fair competition between EU industries and foreign producers subject to different climate regulations.
    • Carbon leakage refers to the relocation of industries from countries with strict emission regulations to those with lenient ones, undermining climate goals.
  • Objective:
    • To equalize the carbon cost between domestic (EU) products and imports by applying a carbon price on imported goods based on their embedded emissions.
    • Ensures that imported goods bear the same carbon cost as EU-produced goods regulated under the EU Emissions Trading System (EU ETS).
  • Working of CBAM:
    • Import Reporting: EU importers must declare the embedded greenhouse gas (GHG) emissions in imported products.
    • Carbon Certificates: Importers purchase CBAM certificates equal to the EU carbon price (per tonne of CO₂ equivalent).
    • Adjustment: If the exporting country has a carbon pricing system, equivalent payments made there are deducted from the price owed in the EU.
    • Revenue Use: The EU expects CBAM revenues to fund green transition initiatives.
  • Impact on India:
    • Economic Impact:
      • India exports iron, steel, aluminum, and cement worth billions of dollars annually to the EU.
      • Higher costs due to carbon pricing may make Indian products less competitive in the EU market.
      • Estimated additional cost: 20–35% carbon tax on select imports from 2026.
    • Trade Concerns:
      • Acts as a trade barrier to developing countries like India, China, and Brazil.
      • May undermine the principles of “Common but Differentiated Responsibilities” (CBDR) under the Paris Agreement.
  • India’s Response:
    • Diplomatic Engagement: India is negotiating for recognition of its domestic carbon taxes and emission reduction efforts as equivalent carbon pricing.
    • Policy Countermeasures:
      • Developing its own Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act, 2022, to align with global carbon pricing regimes.
      • Advocating for fair treatment of developing countries at COP29 and WTO forums.
    • Industrial Adaptation: Accelerating the green steel and low-carbon production technologies.
  • Significance of CBAM:
    • Global Climate Governance: Encourages all trading nations to internalize carbon costs.
    • Competitive Fairness: Prevents “carbon dumping” and levels the playing field for compliant industries.
    • Technology Incentive: Pushes exporters toward cleaner production.
  • Criticisms:
    • Disproportionate burden on developing nations.
    • May conflict with the CBDR-RC principle of the UNFCCC.
    • Could lead to trade tensions and green protectionism.
    • Still lacks transparency and harmonized methodology for assessing embedded emissions.
  • Way forward for India:
    • Strengthen domestic carbon market through the CCTS and renewable energy mandates.
    • Seek mutual recognition of India’s emission offset mechanisms under EU CBAM.
    • Develop green supply chains and carbon accounting capacity among industries.
    • Engage diplomatically to ensure equity and transitional support for developing nations.