Why is it in the News?

Recently India has flagged concerns relating to sensitive and confidential trade data of its exporters getting compromised while complying with the European Union’s Carbon Border Adjustment Mechanism (CBAM).

What Is Carbon Border Adjustment Mechanism (CBAM)?

• CBAM is a policy tool introduced by the European Union (EU) to reduce carbon emissions by imposing a carbon tax on imported products, ensuring that they are subject to the same carbon costs as products produced within the EU.
• It is part of the EU's "Fit for 55 in 2030 package" to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.
• The aim of CBAM is to prevent carbon-intensive imports from undermining the EU's climate objectives and to encourage the adoption of cleaner production practices around the world.
• To implement CBAM, importers will need to declare the quantity of goods imported and their greenhouse gas emissions on an annual basis.
• They will need to surrender a corresponding number of CBAM certificates to offset these emissions, and the price of these certificates will be based on the weekly average auction price of EU Emission Trading System (ETS) allowances in Euro/tonne of CO2 emitted.
• It encourages non-EU countries to adopt stricter environmental regulations, reduce global carbon emissions, and prevent carbon leakage by discouraging companies from moving to countries with weaker environmental regulations.
• Additionally, the revenue generated from CBAM will be used to support EU climate policies, which can serve as an example for other countries to promote green energy.

Impact of CBAM on India:

• The EU's carbon border adjustment mechanism will have a negative impact on India's exports of metals such as iron, steel, and aluminium products.
• The mechanism will subject these exports to extra scrutiny and impose carbon levies ranging from 19.8% to 52.7%, which could threaten India's major exports to the EU.
• From 1st January 2026, the EU will start collecting the carbon tax on each consignment of steel, aluminium, cement, fertilizer, hydrogen and electricity, which could further harm India's exports to the EU.
• The high carbon intensity of Indian products, due to coal being the dominant energy source, is a concern for the country as it may result in higher carbon tariffs from the EU.
• India's use of coal is much higher than the EU and the global average, with coal-fired power accounting for almost 75% of India's energy consumption.
• This makes direct and indirect emissions from industries like iron, steel and aluminium a significant worry for India.
• The lack of a domestic carbon pricing scheme in India poses a risk to its export competitiveness, particularly for sectors such as refined petroleum products, organic chemicals, pharma medicaments, and textiles, which are among the top 20 goods imported by the EU from India.
• Countries with a carbon pricing system may have a competitive advantage as they may pay less carbon tax or receive exemptions.
• This risk could expand to other sectors in the future.

What can be done?

• India can take a multi-pronged approach to mitigate the impact of the EU's Carbon Border Adjustment Mechanism (CBAM) on its exports.
• One of the ways is to implement a Decarbonization Principle, which refers to reducing or eliminating greenhouse gas emissions from human activities such as transportation, power generation, manufacturing, and agriculture.
• The government could complement its existing schemes such as the National Steel Policy and the Production Linked Incentive (PLI) scheme with a Decarbonization Principle.
• This would encourage industries to focus on carbon efficiency, making their products more competitive in a carbon-conscious world.
• Another way is to negotiate with the EU to recognize its energy taxes as equivalent to a carbon price.
• India could also negotiate with the EU to transfer clean technologies and financing mechanisms to aid in making India's production sector more carbon efficient.
• One way to finance this is to propose that a portion of the EU's CBAM revenue could be set aside to support India's climate commitments.
• Additionally, India could begin preparing for the new system by establishing a Carbon Trading System, as China and Russia do.
• India can encourage sustainable and eco-friendly production by providing incentives, which will enable the country to stay competitive in a more carbon-conscious future while achieving its 2070 Net Zero Targets. This will help India pursue its developmental goals and economic aspirations without any compromise.