The European Union’s Carbon Border Adjustment Mechanism (CBAM) has begun its transitional phase as of October 2023, and its full implementation is set for January 2026. CBAM is a policy tool under the EU’s “Fit for 55 in 2030” package, aimed at reducing greenhouse gas emissions by 55% by 2030 compared to 1990 levels. It levies a carbon tax on imports of goods manufactured using processes considered environmentally unsustainable.
- CBAM will impose a tax ranging between 20% and 35% on select products such as steel, aluminum, cement, fertilizers, hydrogen, and electricity.
- Importers will be required to declare the carbon footprint of imported goods annually and purchase CBAM certificates to offset these emissions. The price of these certificates will align with the EU’s Emission Trading System (ETS).
The mechanism is designed to prevent carbon leakage by discouraging companies from shifting production to regions with lenient environmental standards. Furthermore, the revenue generated will be used to fund EU climate policies.
How CBAM Impacts India’s Export Competitiveness
The mechanism specifically targets energy-intensive sectors, which are pivotal to India’s exports to the EU. Products like iron, steel, aluminum, and others fall under the immediate scope of CBAM.
- Over the last five fiscal years, iron and steel exports accounted for nearly 77% of India’s exports to the EU covered by CBAM, with aluminum, cement, and fertilizers following closely behind.
- India’s heavy reliance on coal-based energy, which constitutes approximately 75% of its energy mix, results in significantly higher carbon intensity compared to the EU’s 15% reliance on coal. This disparity places Indian products at a disadvantage due to higher CBAM tariffs.
- The EU’s plans to expand CBAM to cover additional sectors like refined petroleum products, organic chemicals, and textiles could further erode India’s export competitiveness in the region.
The absence of a domestic carbon pricing mechanism in India exacerbates the situation, as it denies Indian exporters any offset to the carbon tariffs imposed by the EU. Without immediate action, India’s market share in Europe could face severe erosion.
Steps India Must Take to Mitigate CBAM’s Challenges
Strengthening Domestic Decarbonization
India’s industries must adopt sustainable practices to align with global climate norms:
- Integrating low-carbon technologies into sectors such as manufacturing and power generation can significantly reduce emissions. Decarbonizing these industries would make Indian exports less vulnerable to CBAM.
- While the National Steel Policy and Production Linked Incentive (PLI) schemes aim to boost domestic production, incorporating carbon efficiency measures into these initiatives is critical to ensure long-term competitiveness.
Negotiating with the EU
India needs to proactively engage with the EU to minimize CBAM’s adverse effects:
- India should push for the recognition of its energy taxes, such as the coal tax, as an equivalent measure to carbon pricing. This could help offset some of the tariffs imposed under CBAM.
- Negotiations could also focus on ensuring that revenues generated by CBAM are redirected toward supporting clean technology transfers and capacity-building initiatives in developing countries.
Establishing a Domestic Carbon Pricing System
- Creating a carbon trading market similar to those in China or Russia would help India align with global carbon standards, making its industries more resilient to policies like CBAM.
- A domestic carbon pricing system could also prepare Indian companies to participate in international markets while reducing their environmental impact.
Advocating for Equity in Global Climate Policies
India should take a leadership role in advocating for fairer climate policies:
- India can champion the concept of Equity-Based Accounting (EBA) at international forums like COP29. This framework emphasizes shared responsibilities among nations based on factors like per capita emissions, GDP, and historical contributions to climate change, as opposed to the unilateral nature of CBAM.
- Highlighting the disproportionate burden CBAM places on developing nations can strengthen India’s position while fostering solidarity with other impacted countries.
The Broader Implications of CBAM
While the EU portrays CBAM as an environmental initiative, it has significant protectionist undertones:
- The €5 billion to €14 billion annual revenue that CBAM is expected to generate by 2030 will be funneled into EU-specific projects like the NextGenerationEU recovery fund, rather than being shared with affected trading partners.
- Such policies risk creating a divide between developed and developing countries, undermining the collaborative spirit necessary to tackle global climate challenges.
For India, CBAM is not just a trade challenge but also an opportunity to revamp its industrial processes. By adopting sustainable practices and leveraging global platforms to advocate for equitable policies, India can transform this challenge into a strategic advantage. This proactive approach will not only preserve its export competitiveness but also contribute to global climate goals.