Contemporary issues
• The European Union (EU) has announced that its Carbon Border
Adjustment Mechanism (CBAM) will be introduced in its transitional
phase from October 2023, which will levy a carbon tax on imports of
products made from the processes which are not Environmentally
sustainable or non-Green.
• CBAM will translate into a 20-35 % tax on select imports into the EU
starting 1st January 2026.
What is “CBAM”
• Introduced in 2023 by the European Union,
• The ‘Carbon Border Adjustment Mechanism’ will apply a carbon price
on emissions embedded in the production of carbon-intensive goods
imported to the region.
• CBAM is part of the “Fit for 55 in 2030 package", which is the EU’s
plan to reduce greenhouse gas emissions by at least 55% by
2030 compared to 1990 levels in line with the European Climate Law.
• The CBAM is a policy tool to reduce Carbon Emissions by ensuring
that imported goods are subject to the same carbon costs as products
produced within the EU.
What Measures can India Take to
Mitigate the Impact of CBAM?
• Decarbonization Principle:
• On the domestic front, the government has schemes like National
Steel Policy, and the Production Linked Incentive (PLI) scheme aims to
increase India’s production capacity, but carbon efficiency has been
out of the objectives of such schemes.
• The government can complement these schemes with
a Decarbonization Principle.
• Decarbonization refers to the process of reducing or eliminating
greenhouse gas emissions, especially carbon dioxide (CO2), from
human activities such as transportation, power generation,
manufacturing, and agriculture.
Conclusion
• When completely implemented, the CBAM will apply a carbon price
on emissions embedded in the production of carbon-intensive goods
imported to the EU.
• Essentially, a non-EU producer would be required to purchase a
CBAM certificate for every tonne of CO2/CO2e (carbon dioxide or
equivalent) emissions at a price that mirrors the carbon price under
the EU’s Emissions Trading System (EU ETS).
• By doing so, the EU aims to ensure that both imported and domestic
goods are subjected to similar carbon pricing rules, thereby creating a
level playing field.
Scope of CBAM
• Scope of CBAM extends to imported goods and their relevant input
materials (precursors) pertaining to six sectors.
• These sectors – namely, cement, fertilisers, aluminium, chemicals
(hydrogen), electricity, and iron and steel – are deemed to be
emission-intensive and at a high risk of carbon leakage under the EU
ETS.
• Producers of goods covered under these sectors with a high degree of
export dependence on the EU will be particularly vulnerable to the
impacts of CBAM, in terms of complicated monitoring, reporting, and
verification (MRV) processes or fluctuations in the EU ETS carbon
price.
• Given that CBAM’s financial obligations for exporters will directly
depend on their emissions intensity of production, relatively cleaner
exporters are likely to gain trade competitiveness at a global scale.
• Therefore, the adoption levels of decarbonisation and energy-
efficient technologies of an exporter vis-à-vis their competitors can be
a significant factor in determining trade competitiveness moving
forward
SCM Agreement : Notification of Subsidies