CBAM: Its Impact on India and Industry Preparation

The Carbon Border Adjustment Mechanism (CBAM), introduced by the European Union, aims to reduce global carbon emissions by imposing levies on imports from countries with less stringent climate policies. Set to take effect from 2026, CBAM covers industries such as steel, aluminum, fertilizers, and cement, which are carbon-intensive. For countries like India, CBAM presents both challenges and opportunities as it will impact export costs and demand significant shifts in production practices.

Implications of CBAM for India

CBAM could significantly affect Indian industries that export to the EU. Here are the key implications:

1. Increased Costs and Reduced Competitiveness: Indian companies may need to invest in cleaner technologies, carbon reporting, and CBAM certificates to remain competitive. This could lead to higher production costs, squeezing profit margins for sectors such as steel, cement, and chemicals.

2. Carbon Footprint Scrutiny: Indian exports will be subject to detailed carbon emission calculations. Non-compliance or failure to match EU carbon reduction standards might result in market access challenges or preference for EU-based suppliers over Indian exports.

3. Legal and Trade Complexities: The introduction of CBAM raises concerns over fair trade practices. India and other countries are evaluating if the mechanism aligns with World Trade Organization (WTO) principles, with the possibility of legal challenges being considered

India’s Preparations for CBAM

The Indian government has adopted a multi-pronged strategy to mitigate CBAM’s effects:

1. Engagement with the EU: India has been actively engaging with EU policymakers to ensure that the transition to CBAM does not unfairly penalize developing countries like India. There are discussions about potential accommodations to support sustainable development efforts in such economies.

2. Domestic Carbon Pricing Mechanism: India is considering the introduction of carbon taxes or emissions trading schemes to align with international climate norms. This would not only prepare Indian businesses for CBAM compliance but also foster a domestic low-carbon economy.

3. Incentivizing Green Technologies: The government is promoting investments in renewable energy and clean technologies through initiatives like the Production-Linked Incentive (PLI) schemes. These incentives help industries adopt sustainable practices and reduce their carbon footprint.

4. Focus on Sustainability Reporting: Emphasizing environmental, social, and governance (ESG) standards, the government encourages industries to adopt robust sustainability reporting frameworks to enhance transparency and build trust among international buyers

How Indian Industries Are Preparing for CBAM

Several Indian companies are proactively adopting sustainable practices and recalibrating their strategies to align with CBAM. Key trends include:

1. Decarbonization Efforts: Indian exporters in sectors such as steel, cement, and chemicals are investing in low-carbon technologies to meet future compliance standards. Many are adopting renewable energy sources and improving operational efficiency to reduce emissions.

2. Sustainability Reporting and Audits: Companies are enhancing their carbon footprint monitoring systems to ensure accurate reporting. Voluntary ESG disclosures and third-party verifications are becoming more common to prepare for CBAM requirements.

3. Market Diversification: Some exporters are exploring opportunities outside the EU to reduce dependency on CBAM-affected markets, while others are investing in partnerships and research to develop sustainable products that meet EU standards

Challenges and Opportunities for India

Challenges:

- High Initial Costs: Transitioning to sustainable practices demands significant investments in infrastructure, technology, and reporting frameworks.

- Global Competition: Indian companies will face stiff competition from other countries that have already adopted stringent environmental practices.

Opportunities:

- Catalyst for Sustainability: CBAM could push India towards a green economy, stimulating innovation in renewable technologies and reducing emissions.

- Access to New Markets: By aligning with global climate standards, Indian companies can strengthen their market position and attract environmentally conscious buyers.

CBAM represents both a challenge and an opportunity for India. While the mechanism pressures Indian industries to adopt sustainable practices and could lead to increased costs, it also offers a pathway towards a more resilient and green economy. The government's strategic initiatives—ranging from carbon pricing mechanisms to investments in green technology—demonstrate India’s commitment to navigating the challenges posed by CBAM while embracing sustainability. For Indian industries, proactive adaptation will be crucial to not only survive the transition but also thrive in the emerging low-carbon global economy.