By Rameesh Kailasam & Mollshree Garg
Europe is at the forefront of climate protection and is leading the global environmental agenda with the goal of becoming the first climate-neutral continent by 2050. In September 2020, the European Union (EU) declared its aim to reduce emissions by 55% by 2030 compared to 1990 levels.
As part of the Fit for 55 package, the EU is revising its Emissions Trading System, expanding its scope to include new sectors, reducing overall allowances, and phasing out free allowances. While this encourages industrial decarbonisation, it also raises carbon prices, posing a risk of carbon leakage. Carbon leakage could happen if consumers switch to non-EU goods with lower emission reduction requirements or if firms move production to countries with lower production costs and less stringent emission regulations.
Also Read Pakistan’s Kashmir Over- Obsession is Suicidal The MV Ruen Episode: Payoffs from Investing in Naval and Air Power Happiness in India: India’s economic growth over time does not show up in improved happiness score and ranking Tax burden on a minority: ITR filing has improved, but how long can less than 3% support the rest? To address these challenges and exert global influence on climate change, the EU is implementing the Carbon Border Adjustment Mechanism (CBAM). Its primary objective is to address greenhouse gas emissions in imported goods, preventing carbon leakage and supporting the Paris Agreement’s goals. The secondary objective is to incentivise operators in non-EU countries to reduce carbon emissions. The CBAM aligns with World Trade Organization (WTO) rules and levels the playing field between non-EU and EU-based producers, ensuring fairness and reducing global carbon emissions.
The CBAM, effective from 2026 with a transitional phase from 2023 to 2026, initially applies to specific goods like cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. The EU plans to extend its scope to all sectors subject to EU emissions trading by 2030, impacting countries like Russia, Ukraine, Turkey, India, and China.
Internationally, there is a shared understanding of the necessity to establish sustainable development pathways and pursue a net-zero future to avert a catastrophe. However, this transition should be rapid, yet fair and inclusive, especially considering the Global South, which has endured the repercussions of industrialisation primarily driven by the Global North.
It is crucial to acknowledge that many nations in the Global South still have carbon-intensive production processes, and their shift to a green economy may extend beyond 2026. Presently, per capita carbon emissions in the US, Canada, Australia, and the EU are significantly higher than those in South Asian nations like India, Bangladesh, Nepal, and Myanmar.
The implementation of the CBAM presents difficulties for South Asian countries that have not yet shifted to low-carbon industrial practices. With the CBAM in place, these nations could encounter penalties, diminishing the competitiveness of their goods in the EU market and challenging the notion of a fair transition.
Furthermore, the CBAM creates an inequity by compelling developing nations to surpass their commitments under the Paris Agreement. While India has committed to reducing the emission intensity of its gross domestic product, it has not committed to carbon emissions levels that are equivalent to the EU’s. EU trading partners, including China, view the CBAM as a trade barrier, and some nations, like Turkey, have ratified the Paris Agreement due to CBAM pressure.
India is alarmed by the CBAM, and has been engaging in continuous discussions with the EU on its potential implications. India is among the top eight countries anticipated to be negatively impacted by the CBAM, particularly in core sectors like steel.
Concerns are raised that the EU plan could render obsolete India’s free trade agreements and potential agreements with the EU, as prices of exported goods may rise significantly after the carbon tax. The Federation of Indian Export Organisations warns that nearly $8 billion of exports, primarily steel, iron ore, and aluminum, could face tariffs initially, expanding to cover all goods exported to the EU by 2034.
Indian policymakers advocate alternative measures to address climate change and carbon emissions without unfairly penalising Indian industries. These measures may include proposing alternative policy frameworks, seeking exemptions for certain industries or products, and providing support, incentives, or subsidies to encourage the adoption of cleaner technologies by Indian industries.
In addition to engaging with the EU, India is exploring opportunities to diversify export markets and reduce dependence on any single region. The country is also laying the groundwork for a domestic carbon market, as evidenced by the draft of the carbon credits trading scheme published by the ministry of power on March 27, 2023. India has formally approached the EU, seeking recognition of its domestic carbon credit trading programme once finalised.
India faces limited options within the CBAM framework. One approach is to challenge the practice as violative of the common but differentiated responsibilities principle under the Paris Agreement. Another option is for the EU to collect the tax and redirect funds to affected countries for investment in green technologies. Ongoing negotiations between India and the EU must be closely monitored, especially as the CBAM enters its definitive phase in 2026. India has already raised concerns at the WTO, invoking special and differential treatment provisions.
As negotiations and policy support continue, Indian businesses can take proactive steps to prepare for and mitigate the impact of the CBAM. This includes understanding CBAM regulations, assessing potential financial implications, conducting comprehensive assessments of carbon footprints, investing in clean and energy-efficient technologies, streamlining supply chains, exploring voluntary carbon offsetting options, and diversifying export markets beyond the EU. These measures can help Indian exporters navigate the challenges posed by the CBAM effectively.
Rameesh Kailasam & Mollshree Garg, Respectively, CEO, Indiatech.org and India managing partner, ERM
By Rameesh Kailasam & Mollshree Garg
Europe is at the forefront of climate protection and is leading the global environmental agenda with the goal of becoming the first climate-neutral continent by 2050. In September 2020, the European Union (EU) declared its aim to reduce emissions by 55% by 2030 compared to 1990 levels.
As part of the Fit for 55 package, the EU is revising its Emissions Trading System, expanding its scope to include new sectors, reducing overall allowances, and phasing out free allowances. While this encourages industrial decarbonisation, it also raises carbon prices, posing a risk of carbon leakage. Carbon leakage could happen if consumers switch to non-EU goods with lower emission reduction requirements or if firms move production to countries with lower production costs and less stringent emission regulations.
To address these challenges and exert global influence on climate change, the EU is implementing the Carbon Border Adjustment Mechanism (CBAM). Its primary objective is to address greenhouse gas emissions in imported goods, preventing carbon leakage and supporting the Paris Agreement’s goals. The secondary objective is to incentivise operators in non-EU countries to reduce carbon emissions. The CBAM aligns with World Trade Organization (WTO) rules and levels the playing field between non-EU and EU-based producers, ensuring fairness and reducing global carbon emissions.
The CBAM, effective from 2026 with a transitional phase from 2023 to 2026, initially applies to specific goods like cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. The EU plans to extend its scope to all sectors subject to EU emissions trading by 2030, impacting countries like Russia, Ukraine, Turkey, India, and China.
Internationally, there is a shared understanding of the necessity to establish sustainable development pathways and pursue a net-zero future to avert a catastrophe. However, this transition should be rapid, yet fair and inclusive, especially considering the Global South, which has endured the repercussions of industrialisation primarily driven by the Global North.
It is crucial to acknowledge that many nations in the Global South still have carbon-intensive production processes, and their shift to a green economy may extend beyond 2026. Presently, per capita carbon emissions in the US, Canada, Australia, and the EU are significantly higher than those in South Asian nations like India, Bangladesh, Nepal, and Myanmar.
The implementation of the CBAM presents difficulties for South Asian countries that have not yet shifted to low-carbon industrial practices. With the CBAM in place, these nations could encounter penalties, diminishing the competitiveness of their goods in the EU market and challenging the notion of a fair transition.
Furthermore, the CBAM creates an inequity by compelling developing nations to surpass their commitments under the Paris Agreement. While India has committed to reducing the emission intensity of its gross domestic product, it has not committed to carbon emissions levels that are equivalent to the EU’s. EU trading partners, including China, view the CBAM as a trade barrier, and some nations, like Turkey, have ratified the Paris Agreement due to CBAM pressure.
India is alarmed by the CBAM, and has been engaging in continuous discussions with the EU on its potential implications. India is among the top eight countries anticipated to be negatively impacted by the CBAM, particularly in core sectors like steel.
Concerns are raised that the EU plan could render obsolete India’s free trade agreements and potential agreements with the EU, as prices of exported goods may rise significantly after the carbon tax. The Federation of Indian Export Organisations warns that nearly $8 billion of exports, primarily steel, iron ore, and aluminum, could face tariffs initially, expanding to cover all goods exported to the EU by 2034.
Indian policymakers advocate alternative measures to address climate change and carbon emissions without unfairly penalising Indian industries. These measures may include proposing alternative policy frameworks, seeking exemptions for certain industries or products, and providing support, incentives, or subsidies to encourage the adoption of cleaner technologies by Indian industries.
In addition to engaging with the EU, India is exploring opportunities to diversify export markets and reduce dependence on any single region. The country is also laying the groundwork for a domestic carbon market, as evidenced by the draft of the carbon credits trading scheme published by the ministry of power on March 27, 2023. India has formally approached the EU, seeking recognition of its domestic carbon credit trading programme once finalised.
India faces limited options within the CBAM framework. One approach is to challenge the practice as violative of the common but differentiated responsibilities principle under the Paris Agreement. Another option is for the EU to collect the tax and redirect funds to affected countries for investment in green technologies. Ongoing negotiations between India and the EU must be closely monitored, especially as the CBAM enters its definitive phase in 2026. India has already raised concerns at the WTO, invoking special and differential treatment provisions.
As negotiations and policy support continue, Indian businesses can take proactive steps to prepare for and mitigate the impact of the CBAM. This includes understanding CBAM regulations, assessing potential financial implications, conducting comprehensive assessments of carbon footprints, investing in clean and energy-efficient technologies, streamlining supply chains, exploring voluntary carbon offsetting options, and diversifying export markets beyond the EU. These measures can help Indian exporters navigate the challenges posed by the CBAM effectively.
Rameesh Kailasam & Mollshree Garg, Respectively, CEO, Indiatech.org and India managing partner, ERM
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