Carbon Border Adjustment Mechanism (CBAM)

Debamitra Panda

The Reason it is making headlines.

Starting from January 1, 2026, the European Union (EU) intends to enforce a Carbon Border Adjustment Mechanism (CABM) tax, which will result in higher taxes on exported goods from non-EU countries. The reporting cycle has begun from October 2023

Background:

Countries and international organizations globally are initiating diverse efforts to address climate change. An example of such an initiative is the Carbon Border Adjustment Mechanism, introduced by the EU as a component of the "Fit for 55 in 2030" initiative.

The goal of "Fit for 55 in 2030 Package" is to decrease greenhouse gas (GHG) emissions in the EU to 55% of the 1990 level by 2030.

Let’s Know About CBAM

The Carbon Border Adjustment Mechanism (CBAM) is the world’s first carbon border tax, created by the EU, with the aim of reducing carbon emissions.

It signifies a justifiable fee imposed on the carbon emissions generated during the production of carbon-intensive products entering the market.

As a component of the European Green Deal, it has been legislated to take effect from 1st January 2026, with reporting slated to begin in 2023.The tax could be around 20-35% depending upon product.

The initial scope of CBAM includes carbon-intensive sectors like iron and steel, aluminium, cement, fertilizers, electricity, and hydrogen. It will work in coordination with Emission Trading schemes of EU.

Goal of CBAM

To prevent “Climate Leakage” (Carbon leakage occurs when a company relocates its production from a country with strict regulations to another with relaxed policies, resulting in a rise in greenhouse gas emissions.)

It will encourage producers in non-EU countries to adopt more stringent environmental regulations, which would reduce global carbon emissions in their manufacturing process.

Application of CBAM:

Importers in the EU will be required to purchase carbon certificates equivalent to the import's carbon cost if the product were manufactured in Europe.

If a non-EU producer is paying a carbon price or tax for the carbon used to produce the imported goods, whether domestically or in another country, the corresponding cost would be deducted for the EU importer.

The Pricing will be in determined according to ETS rates.

(Emissions Trading System, creates a carbon market by using a cap & trade system, presents a cost-efficient approach to reduce greenhouse gas emissions.

To motivate companies to decrease their emissions, government establishes a cap on the highest permissible level of emissions and issues permits, or allowances, for each unit of emissions permitted within that cap.

Emitting companies are required to acquire or surrender a permit for every tonne of CO2 they emit within one calendar year. Firms that expect not to have enough permits must either cut back on their emissions or buy permits from another firm.)

The European Commission, in collaboration with relevant authorities, will oversee the review and verification of declarations, as well as the management of the central platform for the sale of CBAM certificates.

The?EU ETS?covers CO2 emissions from Electricity and heat generation,?, energy-intensive heavy industry like oil refineries, steelworks, and producers of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids, and bulk organic chemicals; commercial aviation sectors as of now.

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Why is CBAM Opposed?

CBAM imposes a carbon charge on companies from countries that were not the primary contributors to climate change. For instance, Mozambique's GDP could decrease by approximately 1.5% solely due to tariffs on aluminium exports (as per a report by the Centre for Global Development), while Zimbabwe's iron and steel exports to the EU would also be impacted.

It could potentially contradict the Paris Agreement, which allows countries to develop their own nation specific policy.

There are no exemptions for Least Developed Countries (LDCs) under the CBAM.

Consequences For India

Some provisions of CBAM are not in India's favour, particularly concerning steel, which constitutes a major export to the EU and is included in the EU's initial list of carbon-intensive sectors.

The BASIC countries grouping (Brazil, South Africa, India, China) has labelled CBAM as discriminatory, citing its inconsistency with the principle of common but differentiated responsibility.

The European Union holds significant importance as an export market for India, standing as its third-largest trading partner.