Equity Check: Is Carbon Border Adjustment Mechanism (CBAM) fair for all?

Debamitra Panda

Throughout CBAM's transition phase, starting from October 2023 to December 2025, importers must report emissions linked to imports. However, they are not obligated to make any financial adjustments during this period. But from 1st Jan 2026 The European Union will start putting carbon tax on countries under CBAM.

EU policy makers believe as long as less stringent policies prevail in many non -EU countries, there is a risk of “Carbon Leakage”.

(Carbon Leakage: Carbon leakage is a phenomenon observed when carbon-intensive products are exported from regions with stringent environmental regulations to countries with less rigorous policies in place. This often occurs as industries seek to avoid compliance costs or regulatory burdens by relocating their operations to jurisdictions with less stringent environmental standards)

This will adversely affect India’s 8 billion dollars’ worth of metal exports to the European market.

Several issues and confusions surround CBAM. Some of these include:

• India is concerned that the implementation of the border tax might lead to a considerable rise in the prices of goods within Europe. This price escalation may result in a reduction in demand for these goods among European consumers.
• The EU's proposal contradicts the UN principle of Common but Differentiated Responsibilities and respective capabilities. This principle recognizes that all countries share the responsibility to address global challenges like climate change, but acknowledges that different countries have varying levels of capacity and historical contributions to the issue. By imposing uniform border taxes without considering these differences, the EU's proposal fails to align with this principle, potentially creating inequities in the global response to climate change
• Some worry that CBAM may not align with the regulations and agreements established by the World Trade Organization (WTO). This concern arises from the potential for CBAM to introduce trade barriers or discrimination against certain countries, which could violate WTO rules aimed at promoting free and fair trade among nations.
• In the future, it is anticipated that the scope of CBAM will likely be extended.
• We've discussed the direct impact on our exports, but what we haven't addressed is the significant amount of aluminium and steel that is shipped to Asia and the Middle East, processed, and then re-exported to the EU. This will result in a realignment of value chains and also have an impact on exports to third countries. Therefore, CBAM will not only affect our exports to the EU but also impact our exports to neighbouring regions.
• In the context of CBAM, the EU's request for nations to disclose both direct and indirect emissions is significant. However, what raises greater concerns is the requirement for companies to pinpoint longitude and latitude coordinates and affix a UN logo. This effectively grants regulators in Brussels access not only to data from thousands of installations within the EU but also to verified location-specific information from hundreds or even thousands of installations worldwide. The sheer volume of data generated could substantially boost the EU's position in trade and climate negotiations, presenting significant challenges.

What specific inquiries should India make?

• India should make a strong case for excluding Micro, Small, and Medium Enterprises (MSMEs) from the Carbon Border Adjustment Mechanism (CBAM). This exemption is crucial considering the unique challenges faced by MSMEs, including limited resources and capacity compared to larger corporations. By advocating for this exclusion, India can mitigate the potential adverse impact of CBAM on its MSME sector, which is vital for employment generation and overall economic growth.
• Clause restricting the sharing of data among EU institutions. i.e If data is submitted to the CBAM registry, it should not simultaneously be shared with the environmental division of the EU. Therefore, this should be India's request if we are truly committed to protecting our data privacy.
• The inclusion of a clause seeking recognition of energy taxes should be discussed. This is a complex issue due to the diverse range of taxes imposed on petroleum, coal, and other energy sources. These taxes affect industries in different ways, adding complexity to the formulation process. To address this, the proposal suggests converting these energy taxes into a carbon price equivalent and seeking acknowledgment for them as legitimate deductions.

In conclusion, India faces significant considerations regarding the Carbon Border Adjustment Mechanism (CBAM). While acknowledging the necessity of global efforts to combat climate change, India must ensure that CBAM implementation does not disproportionately affect its economy. It is crucial for India to engage in constructive dialogue with international partners to advocate for fair and equitable treatment under CBAM. This includes addressing concerns related to the impact on key industries, such as MSMEs, and exploring mechanisms for exemptions or transitional arrangements where necessary. Moreover, India should actively pursue opportunities for collaboration, technology transfer, and capacity building to facilitate its transition towards a more sustainable and low-carbon economy. By actively participating in CBAM discussions and advocating for its interests, India can help shape a framework that balances environmental objectives with the needs of developing economies.