The Carbon Border Adjustment Mechanism (CBAM) is a climate-linked trade policy introduced by the European Union (EU) to prevent carbon leakage and ensure fair competition between domestic and foreign producers.
CBAM is a mechanism that imposes a carbon price on imports of certain goods into the EU, equivalent to the carbon price paid by EU producers under the EU Emissions Trading System (EU ETS).
In simple terms, it ensures that imports face the same carbon cost as EU-made products.
Objective of CBAM
- Prevent carbon leakage (shifting of production to countries with weaker climate norms)
- Protect EU industries complying with strict climate regulations
- Encourage global decarbonisation
- Align international trade with the EU Green Deal and climate neutrality goals
Sectors Covered
CBAM initially applies to carbon-intensive sectors, including:
- Iron and steel
- Cement
- Aluminium
- Fertilisers
- Electricity
- Hydrogen
(These sectors are chosen due to high emissions and leakage risk)
How CBAM Works
- Importers must declare embedded carbon emissions in imported goods.
- They must purchase CBAM certificates corresponding to those emissions.
- If a carbon price has already been paid in the exporting country, it can be deducted.
- CBAM certificate prices are linked to EU ETS carbon prices.
Implementation Timeline
- Transition Phase: October 2023 – December 2025
- Only reporting of emissions, no financial payment.
- Full Implementation: From January 2026
- Mandatory purchase of CBAM certificates begins.
- Gradual phase-out of free allowances under EU ETS.
Legal and Policy Basis
- Based on Article XX of GATT (WTO) – environment-related exceptions
- Designed to be WTO-compliant, though its legality may be contested
- Applies equally to all non-EU countries (non-discriminatory in design)
Implications for India
- India is a major exporter of steel, aluminium, cement, and fertilisers to the EU.
- Potential impacts:
- Increased export costs
- Loss of price competitiveness
- Pressure on MSMEs and carbon-intensive industries
- Sectors with low-carbon production may gain relative advantage.
India’s Concerns
- CBAM acts as a non-tariff trade barrier
- Violates the principle of Common But Differentiated Responsibilities (CBDR)
- Disregards historical emissions of developed countries
- Shifts climate burden to developing economies
India’s Response and Way Forward
- Push for mutual recognition of carbon pricing mechanisms
- Develop a domestic carbon market (Indian Carbon Market)
- Invest in green steel, clean energy, and low-carbon technologies
- Raise concerns at WTO, G20, and climate negotiations
- Seek transition support and climate finance from developed countries
Global Significance
- Sets a precedent for climate-linked trade policies
- May trigger similar measures by other developed economies
- Risks fragmentation of global trade if not harmonised
Conclusion
CBAM represents a shift where climate policy intersects with global trade. While it strengthens climate accountability, it raises serious equity and developmental concerns for countries like India. The challenge lies in balancing climate ambition with trade fairness and developmental justice.
