Carbon Border Adjustment Mechanism [UPSC Notes]

The European Union is about to implement the carbon border adjustment mechanism from October 1st, 2023 and it is expected to impact India’s metal export to the EU countries. This is an important development and is relevant for various sections of the UPSC syllabus such as economy, environment & ecology and international relations.

Carbon Border Adjustment Mechanism (CBAM)

It is a mechanism to be introduced by the European Union (EU) to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.

• The EU plans a gradual introduction of CBAM from 1st October 2023 and this will translate into a 20-35% tax on selected imports to the EU nations by 1st January 2026.
• From 1st January 2026, the EU will start levying the carbon tax on multiple products exported to the EU.
• The products included in the CBAM list will be expanded over a period of time and by 2034, it will cover all products entering the EU.

Also read: Environmental Taxes

Impact of CBAM on India

• CBAM will hurt the global trade of developing countries, especially India.
• In 2022, India’s 27% of the total export in iron, steel, and aluminium products (valuing USD 8.2 billion) went to the EU.
• Under this mechanism, from 1st October 2023, India’s export of Iron and aluminum to EU nations, will attract extra scrutiny.
• The tariffs for iron, steel, and aluminum products will be raised to 20-35 percent, exceeding the EU’s agreed-upon bound tariff rate of 2.2 percent for its manufacturers at the World Trade Organization (WTO). This will increase costs resulting in the loss of billions of dollars of exports.
• Though fertilizer, cement and electrical energy are the other affected products, India’s export on these products to the EU is very negligible and hence won’t impact India that much.
• As the EU adds more items to the CBAM list after 1st January 2026, the impact will be more on Indian exporters.

Way Forward

• Setting up of a task force to prepare the ministries and the industry to meet the challenges of CBAM.
• All the industry players involved in the steel and aluminum sector need to be educated to meet the deadline of 1st October.
• A carbon market needs to be set up in India.

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