The European Union’s carbon tax, formally known as the Carbon Border Adjustment Mechanism (CBAM)

The European Union’s carbon tax, formally known as the Carbon Border Adjustment Mechanism (CBAM), is a trade policy aimed at reducing carbon emissions globally by imposing a carbon price on certain imported goods based on their emissions. Starting from October 2023, CBAM initially applies to high-emission sectors like cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen, with full implementation expected by 2026.

How CBAM Works?

• Carbon Pricing on Imports: CBAM imposes a carbon cost on imports to the EU equivalent to what EU companies pay under the EU Emissions Trading System (ETS). Importers will need to purchase CBAM certificates, the cost of which will reflect the carbon emissions generated in the production of those goods.
• Environmental Standards and Compliance: The CBAM mandates that countries exporting carbon-intensive goods to the EU either match the EU’s carbon standards or face extra costs. Countries with strong carbon regulations may receive exemptions if they demonstrate equivalent carbon-pricing policies.

Impact on Indian Trade Exports:

1. Increased Costs for High-Emission Industries: Indian exports, particularly from high-emission sectors like steel, aluminum, and cement, may face increased costs to meet EU standards. Since India is a significant exporter of these goods to the EU, the additional carbon costs could impact their price competitiveness.
2. Impact on Small and Medium Enterprises (SMEs): Many Indian SMEs that supply raw materials or semi-finished products in the EU supply chain could be affected, as they may struggle to absorb the extra carbon-related costs, thus risking competitiveness.
3. Pressure to Adopt Green Technologies: The CBAM could push Indian companies toward cleaner production methods and investments in green technology to reduce carbon emissions, especially if they want to maintain their market share in the EU. While this shift would have long-term benefits, it may initially require significant investment and technology upgrades.
4. Possible Trade Diversion: Some Indian exporters might consider diverting their products to markets with less stringent environmental standards. However, as more countries adopt similar carbon regulations, long-term reliance on such markets may limit growth prospects.
5. Opportunity for Low-Carbon Product Exports: Companies that successfully transition to greener production processes might benefit from CBAM, as their lower-carbon products could gain a competitive edge in the EU. This shift could also create opportunities for Indian industries specializing in clean technology.
6. WTO Concerns: India has raised concerns about CBAM’s compatibility with World Trade Organization (WTO) rules, viewing it as a trade barrier. India has argued that CBAM could disproportionately impact developing nations that have different economic and industrial contexts.

India’s Response and Way Forward:

To mitigate the impact of CBAM, India may take the following steps:

• Policy Adjustments: The government may implement policies to support the green transition in high-emission industries, including incentives for green technology and subsidies for emissions reductions.
• Bilateral Discussions: India has engaged in dialogues with the EU to seek exemptions or adjustments, arguing that CBAM could unfairly burden developing economies.
• Investment in Renewable Energy: India’s focus on renewable energy can also support emission reductions in sectors impacted by CBAM, aligning with national goals for carbon neutrality and enhancing global competitiveness.