CBAM – Carbon Border Adjustment mechanism

CBAM: The increase of the temperature and the carbon emissions around the World is a cause of concern for everyone at this point of time. The emission of greenhouse gases is causing global warming and climate change at a high rate. This is a very concerning issue which needs our attention. Therefore, a lot of steps have been taken and will be taken in the future to cure this problem.

The formation of the UNFCCC, The Kyoto Protocol etc are some of the steps taken in this direction. Developed countries like USA, European Union are trying to cut down the carbon emissions and therefore they are also taking some steps towards it but a very important thing which needs to be kept in mind is about the developing countries who are trying to improve their position in the world and therefore are involved in carbon emissions which are necessary for their development.

But some things which are being done by the developed countries are not acceptable like the financing which was promised to the developing countries and the least developed countries is not being given and organizations like the European Union are formulating such laws and mechanisms which would work as a barrier in the development of these developing countries. Therefore, in this article we will be learning about one of those barriers which would definitely affect the economic status of developing countries like India.

We will be talking about the Carbon Border Adjustment Mechanism given by the European Union which would come into effect from the year 2026.

Carbon Border adjustment mechanism (CBAM)

What is CBAM

CBAM is a tax which would be levied on products which would be made through a non green or environment unfriendly manner.

The products which would lead to carbon emissions and would impact the environment, on those products the carbon tax would be imposed.

It is part of the European Union’s “Fit for 55 in 2030 package“. The EU’s goal is to reduce the greenhouse gas emissions by at least 55% by the year 2023. It would be introduced in a transitional phase starting from October 2023 and would be imposing the carbon tax of 20 to 35% on imports in EU from 1st January 2026. It would implement in a way that the importers need to provide the information related to the products being imported and the carbon emissions embedded in it on an annual basis.

It is basically being done to reduce the carbon emissions in the rest of the world and the importers need to provide CBAM certificates under it providing 1000 data points about their production methods.

It’s focus is on targeting the non European countries to reduce their carbon emissions and help in the process of preserving the mother earth. The EU is trying to put stringent measures to restrict the carbon emissions in the rest of the world. As this would make the countries more aware and vigilant during the production process and therefore would reduce the greenhouse gases emission.

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The European Union is focusing on a very important term and that is the carbon leakage in which the companies based in EU shift their production which is carbon intensive to countries where the environment rules are not that stringent and therefore give way to the companies to continue the practice outside EU. It is basically focusing on getting carbon price of imports which is equivalent to the carbon emitted during the whole production process domestically.

In it’s first phase it will be focusing on putting stringent taxes on Some industries which are carbon intensive like cement, steel and iron production ,fertilizers electricity and hydrogen. And a major focus of introducing this transactional phase is that to make aware the people ,the industries through the early process and to realize and make the required changes during the complete phase and to collect the right information and use it afterwards and reap the benefits.

After the completion of the transitional phase the complete system will come into force from 1 January 2026. And in this system the importers need to provide the report of there products which entered EU in the preceding year and the carbon emissions attached to it. On the basis of that the importers would surrender the certificates whose price would be calculated on the weekly average auction price of EU ETS allowances expressed in €/tons of CO2 emitted.

So this is the whole mechanism which would be working in the carbon adjustment mechanism of European Union but as we know that nothing is completely perfect and every country won’t be accepting it in the same way ,as the European Union is thinking just about the developed countries and their goals and developing countries are being neglected in the whole process. Although US has opposed this mechanism but it is also making some efforts in introducing something like this.

So now let’s focus on the impacts of the CBAM on India.

IMPACT ON INDIA

European Union is the third largest market for India’s Exports. In 2022, more than one fourth of India’s export of Iron, steel and aluminum were to EU. And therefore these areas are some of those Areas in which the emissions of carbon are pretty much obvious. Although India is working to reduce the carbon emissions. And due to this carbon tax the Indian exports would be increased in cost by 20 to 35% which would really impact the whole economy and the exports of the country. Around 26.6% of exports of iron, steel and aluminum products go to EU.

And this would really hit back the industries and therefore reduce the exports in some way. And it is definitely a question of privacy as the companies need to provide the data about their production methods and the process which could definitely impact their privacy. It would also impact India in terms of competitiveness as India as a developing country is working in the direction of its development but those developed countries which are capable of cutting down their carbon emissions, would definitely pose a competition and threat as India does not have any domestic carbon pricing scheme till date.

India’s carbon intensity is higher than the European countries because coal is a major factor in most of our industries and is part of the overall energy consumption of the country. Therefore this would pose threat on India’s economy and would lead to high Tariffs in India and therefore would impact its economy.

After knowing about the complications which India would have to face due to CBAM.

Now let’s talk about the steps India is taking to fight back.

Steps taken by India

The Indian government is trying to put forward something similar to CBAM to nudge industries to reduce their carbon emissions and also to use the tax which the government would get through this mechanism in the transition to green energy.

The government has also raised this concern in the World Trade Organization against the CBAM.
The Indian government need to negotiate with the European Union to reduce the tax.

Production of green energy is a very important requirement at this point of time as the carbon emissions are increasing at high rate and they need to be addressed now only. For that the government needs to make a transition but it would be a slow process. Indian government needs to team up with the countries who feel the same due to the introduction of the CBAM by the European Union as collective support is very important in these types of issues.

Conclusion

The mechanism like CBAM is definitely the need of the hour. But in this process we can’t neglect the developing countries.

As European countries were the countries which industrialized at the time when these developing countries were colonized and were not at all aware about the whole mechanism which was working in these countries. After a long time they were able to normalize their situation and understood the functioning of the industries and therefore they are working in that direction in the contemporary Times.

The problem of climate change is also a very crucial one and needs are dire attention as it can’t be neglected. But in the developing countries most of the production is done through coal which is one of the major reason behind carbon emissions in the world as the developing countries are trying to get in pace with the developed countries but they need to use it but other options need to be explored too.

The issue of climate financing is also a barrier to this as the requirements have not been met by the developed countries as they are taking a backfoot in providing funds to the developed countries. Financing need to be done so that they could continue their production and development in accordance with the climate protection. And privacy is also major concern in the CBAM as the contemporary world in which we are living there is a high risk of information leakage as much as the concern of carbon leakage is there. So each step needs to be taken very carefully and a perfect balance needs to be made between development and environment.

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