EU carbon border tax comes into force, raising costs for Indian exporters

The European Union's Carbon Border Adjustment Mechanism (CBAM), which entered its transitional phase on October 1, 2023, represents a pivotal shift in global trade and climate policy. This mechanism is designed to tackle 'carbon leakage,' a phenomenon where companies might move carbon-intensive production to countries with less stringent climate policies to avoid the EU's internal carbon pricing, thereby undermining global climate efforts. CBAM essentially puts a carbon price on imports of certain goods, mirroring the carbon cost that EU domestic producers already bear under the EU Emissions Trading System (ETS).

CBAM is a cornerstone of the EU's ambitious 'Fit for 55' package, which aims to reduce net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. The mechanism targets imports of carbon-intensive goods such as cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. During the transitional period (October 1, 2023, to December 31, 2025), importers are required to report the embedded emissions in their goods without financial charges. From January 1, 2026, the financial levy will commence, requiring importers to purchase CBAM certificates corresponding to the carbon price difference between the country of origin and the EU ETS.

The key stakeholders in this scenario include the **European Union** as the initiator, driven by its climate goals and the need to maintain a level playing field for its industries. The **Indian Government** is a crucial stakeholder, tasked with protecting the interests of its exporters and formulating appropriate policy responses. **Indian industries**, particularly those in the steel, aluminium, and cement sectors, are directly impacted as they face increased compliance costs and potential erosion of their competitiveness in the EU market. Other **developing countries** with carbon-intensive economies also share similar concerns. The **World Trade Organization (WTO)** is another significant stakeholder, as CBAM's compatibility with WTO rules, particularly the principles of non-discrimination and national treatment, is likely to be scrutinized and potentially challenged.

For India, CBAM carries significant implications. Economically, sectors like steel, aluminium, and cement are major contributors to India's exports to the EU. The imposition of a carbon tax will directly increase the cost of these products, potentially making them less competitive against EU domestic production or imports from countries with lower carbon footprints. This could lead to a reduction in export volumes, impacting jobs and economic growth in these crucial manufacturing sectors. Furthermore, it places an additional burden on Indian manufacturers to invest in cleaner technologies and renewable energy sources to reduce their carbon footprint, which, while beneficial for the environment, requires substantial capital expenditure and technological upgrades.

Historically, the concept of carbon pricing and border adjustments has been debated in international climate negotiations for decades, often facing resistance from developing nations under the principle of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC), enshrined in the UNFCCC. India has consistently advocated for developed nations to take the lead in emission reductions and provide financial and technological support to developing countries. CBAM is perceived by some as a unilateral trade measure that could penalize developing economies without adequate support for their green transition.

Looking ahead, CBAM's future implications for India are multifaceted. It presents both a challenge and an opportunity. The immediate challenge is to adapt to the new regulatory landscape, which may involve the Indian government implementing its own carbon pricing mechanisms or providing subsidies and incentives for industries to decarbonize. India's existing climate policies, such as the National Action Plan on Climate Change (NAPCC), its Nationally Determined Contributions (NDCs) under the Paris Agreement (aiming for 45% reduction in emissions intensity by 2030 from 2005 levels and achieving Net Zero by 2070), and initiatives like the National Green Hydrogen Mission and the FAME India Scheme, demonstrate a commitment to green growth. However, CBAM necessitates a more urgent and targeted approach to industrial decarbonization. India might need to accelerate the adoption of renewable energy, improve energy efficiency, and invest in carbon capture technologies. Diplomatically, India will continue to engage with the EU to seek exemptions, phase-outs, or mechanisms that recognize India's climate efforts and developmental needs. There is also the possibility of India, alongside other affected nations, challenging CBAM at the WTO, arguing it constitutes a protectionist trade barrier rather than a purely environmental measure. Domestically, such external pressures could catalyse a faster transition towards a greener economy, aligning with constitutional principles like Article 48A (Directive Principle of State Policy for protection and improvement of environment) and Article 51A(g) (Fundamental Duty to protect and improve the natural environment), by pushing for more stringent environmental standards and a robust carbon market within India.

In conclusion, CBAM is a game-changer for international trade and climate policy. For India, it mandates a strategic re-evaluation of its industrial policies, export strategies, and climate actions, pushing for an accelerated transition towards a low-carbon economy while navigating complex trade and diplomatic challenges.