The European Union (EU) has recently announced the introduction of its Carbon Border Adjustment Mechanism (CBAM), a new measure to impose a carbon tax on imports made through environmentally unsustainable processes. Starting from October 2023, CBAM is set to impose a 20-35% tax on select goods imported into the EU beginning 1st January 2026.
What is the Carbon Border Adjustment Mechanism (CBAM)?
CBAM is part of the EU’s wider “Fit for 55 in 2030” package, an initiative designed to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. This policy tool ensures that goods imported into the EU are subject to the same carbon costs as those produced within its borders. Importers will be required to declare the quantity of goods they bring into the EU and their embedded Greenhouse Gas (GHG) emissions annually. Furthermore, they will need to purchase a corresponding number of CBAM certificates to offset these emissions, priced based on the weekly average auction price of EU Emission Trading System (ETS) allowances in €/tonne of CO2 emitted.
Significance and Objectives of CBAM
CBAM strives to uphold the EU’s climate objectives, ensuring they are not undermined by carbon-intense imports. It also encourages cleaner production globally, as it motivates non-EU countries to implement more stringent environmental regulations to avoid high carbon taxes. Furthermore, CBAM can provide significant revenue to support EU climate policies, which could serve as a model for green energy initiatives in other countries.
Implications of CBAM for India
The introduction of CBAM may adversely impact India’s exports to the EU, especially iron, steel, and aluminum products. These goods will face additional scrutiny and potential levies ranging from 19.8% to 52.7% due to their high carbon emissions. India’s reliance on coal for energy also means that its exports have a higher carbon intensity than many other countries, which could translate to higher tariffs under CBAM.
Risks to India’s Export Competitiveness
Beyond the initial sectors affected, CBAM may expand to impact other industries such as refined petroleum products, organic chemicals, pharmaceuticals, and textiles, all of which are among India’s top exports to the EU. In the absence of a domestic carbon pricing scheme, India is at a disadvantage compared to countries with such systems in place, as they may pay lower carbon taxes or receive exemptions.
Strategies for India to Adapt to CBAM
There are several strategies India could adopt to mitigate the impact of CBAM. Domestically, the government could incorporate decarbonization principles into existing schemes like the National Steel Policy and the Production Linked Incentive (PLI) scheme. Internationally, India could negotiate with the EU to recognize its energy taxes as equivalent to a carbon price. They could also lobby for the transfer of clean technologies and financing mechanisms to support a more carbon-efficient production sector in India.
Green Production and the Future of Indian Exports
Despite the challenges posed by CBAM, it also presents an opportunity for India to shift towards greener, more sustainable production. By incentivizing cleaner production practices, India can remain competitive in an increasingly carbon-conscious global market. Additionally, India, as the leader of G-20 2023, should advocate for countries disproportionately impacted by the EU’s carbon tax framework, particularly those reliant on mineral resources.
Sample Questions from UPSC Civil Services Examination
The following are sample questions related to this topic that could appear in the UPSC Civil Services Examination:
Q1. Which of the following adopted a law on data protection and privacy for its citizens known as ‘General Data Protection Regulation’ in April, 2016 and started implementation of it from 25th May, 2018? (2019)
(a) Australia (b) Canada (c) The European Union (d) The United States of America Ans: (c)
Q2. ‘Broad-based Trade and Investment Agreement (BTIA)’ is sometimes seen in the news in the context of negotiations held between India and (2017)
(a) European Union (b) Gulf Cooperation Council (c) Organization for Economic Cooperation and Development (d) Shanghai Cooperation Organization Ans: (a)