Understanding the EU’s carbon border tax

Last Updated10/01/2024

A concerning development for India is the European Union (EU)'s Carbon Border Adjustment Mechanism (CBAM) and its potential implications.

Objective: To tax carbon-intensive products coming into the EU from 2026
Implemented in two phases, with the first (transitional phase) starting from October 1, 2023.
CBAM intends to achieve the target of a 55% reduction in GHG emissions by 2030, compared to 1990 levels, under the European Green Deal.
A response to the risk of EU industries being replaced by carbon-intensive imports from countries like India or China.

CBAM mirrors the EU's Emission Trading System (ETS) but focuses on imports.
- The EU's Emission Trading System (ETS) sets a cap on the amount of GHG emissions permitted.
- Under the EU-ETS, companies covered by the scheme have to ‘buy’ allowances corresponding to their GHG emissions.
- Financial incentives are provided to cut emissions, but energy-intensive industries receive free allowances to ensure their competitiveness.
Transitional phase (until December 2025): Reporting GHG emissions without financial obligations.
Definitive phase (from January 1, 2026): Importers must surrender CBAM certificates based on declared emissions.
The CBAM will be applied to the actual declared carbon content embedded in the goods imported to the EU.

India criticizes CBAM as "ill-conceived," potentially harming its manufacturing sector.
India's own Carbon Credit Trading System (CCTS) is still in the planning stages.
- It was introduced in December 2022 by amending the Energy Conservation Act, 2001.
- It is proposed to combat climate change by incentivising actions for emission reductions leading to increased investments in clean energy by the private sector.
- The obligatory CCTS model is also coupled with the voluntary market-based mechanism called the Green Credit Programme Rules
The Green Credit Programme Rules encourage more environmentally proactive actions going beyond the carbon reduction mandate.

India is reportedly among the top eight countries adversely affected by CBAM, particularly in sectors like steel.
As per the Global Trade Research Initiative report, in 2022, 27% of India’s exports of iron, steel, and aluminium products worth $8.2 billion went to the EU.

India may challenge CBAM as violative of the Paris Agreement's common but differentiated responsibilities principle.
The EU could collect the tax and return funds to affected countries for green technology investments.
The ongoing negotiations with the EU must be closely observed.
India has already challenged the CBAM before the World Trade Organization under the special and differential treatment provisions.

The EU overlooks factors like cheap labour, alternative production methods, and expansion opportunities in other geographies.
These might dictate the shift of production by EU industries outside the EU.
The UK plans to enforce its own CBAM by 2027, adding pressure on India's exports.

India needs to formulate its own carbon taxation measures that align with the principles of the Paris Agreement while simultaneously safeguarding its industries’ interests.