The European Union touts its Carbon Border Adjustment Mechanism as a pioneering and innovative tool to combat the global climate crisis by pricing the carbon content of imported goods. From January 1, 2025, the CBAM registry will enable manufacturers outside the EU to upload and share their emissions records in a streamlined manner. By January 1, 2026, the CBAM will transition out of its preparatory phase, imposing financial obligations on importers of six high carbon-intensive product categories: aluminium, electricity, fertilisers, cement, hydrogen, and iron and steel.
Beginning in 2026, importers of the designated product categories will be required to purchase CBAM certificates to cover the embedded carbon emissions in imported goods. The cost of these certificates is pegged to the price of EU allowances under the EU Emissions Trading Scheme (ETS), established in 2005. By 2030, CBAM provisions are expected to encompass all sectors covered by the EU ETS, further aligning with the objectives of the European Green Deal.
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The European Green Deal, unveiled in 2019, has been described as Europe’s “man on the moon” moment, with the ambitious target of achieving carbon neutrality by 2050. CBAM supports this goal by addressing the issue of carbon leakage—the transfer of production to countries with less stringent environmental standards—by imposing levies on imports that fail to meet EU’s environmental benchmarks.
Key concerns surrounding CBAM
While CBAM appears to bolster the EU’s climate-neutral ambitions, it has faced criticism and raised several concerns:
Potential Trade Discrimination: Does CBAM’s implementation unfairly discriminate against trading partners or violate World Trade Organisation (WTO) principles of free trade?
Technological and Financial Barriers: Are industries in exporting nations equipped with the necessary resources, technology, and financial support to transition to a low-carbon economy? What role does the EU play in facilitating technology transfer and green financing?
Overlooking Common but Differentiated Responsibilities (CBDR): CBAM’s uniform application disregards the principle of CBDR by failing to account for historical emissions by developed countries and the varying capacities of developing nations.
Revenue Redistribution: The mechanism effectively taxes greenhouse gas (GHG) emissions while funnelling revenue to the EU, despite the environmental damages predominantly affecting exporting countries.
Historical Cost Asymmetry: EU consumers have historically benefited from cheaper imports, while the associated environmental costs have largely burdened underdeveloped or developing nations.
CBAM as a non-tariff barrier
These issues have led many to perceive CBAM as a new form of non-tariff trade barrier. Critics argue that while the EU previously transitioned from tariffs to technical barriers to trade (TBT), CBAM represents a new layer of protectionism aimed at safeguarding domestic industries while generating additional revenue.
India, with $8 billion worth of CBAM-covered goods exported to the EU annually, is particularly vulnerable. The EU accounts for 17.5% of India’s total exports, making it the country’s second-largest trading partner. Key sectors like aluminium and steel are expected to be significantly impacted, with 27% of India’s aluminium ($2.7 billion) and 38% of its steel ($3.7 billion) exports directed to the EU.
Turning challenges into opportunities
For India and other developing nations, CBAM presents a paradoxical opportunity. While it poses challenges as a trade barrier, it also serves as a catalyst to internalise environmental costs and transition towards greener production.
CBAM’s additional costs on carbon-intensive exports could erode India’s competitive edge, especially for exporters without access to affordable clean energy or efficient green technologies. The stringent monitoring, reporting, and verification (MRV) requirements further add to operational costs.
Despite these challenges, CBAM incentivises countries to:
- Accelerate the adoption of renewable energy.
- Invest in energy-efficient and waste-reduction processes.
- Develop domestic carbon pricing mechanisms to align with CBAM requirements, thereby retaining revenue for local decarbonisation projects.
India’s target of achieving 500 GW of non-fossil fuel capacity by 2030 underscores its commitment to sustainability. CBAM could further accelerate this transition, prompting industries to adopt cleaner technologies and improve energy efficiency through appropriate incentives and penalties.
Leveraging international support
Exporting countries can tap into international funding mechanisms like the Green Climate Fund (GCF) to finance their shift from carbon-intensive to low-carbon manufacturing. Additionally, reinvesting revenue generated from domestic carbon pricing into green technologies can support sustainable development.
Developing nations must not abandon efforts to lobby for equitable adjustments to the anti-carbon leakage measure. They should emphasise disparities in developmental stages and historical emissions to advocate for provisions that consider their unique challenges.
EU’s tool underscores the urgency for collective climate action but also demands a nuanced approach to balance compliance with competitiveness. India and other exporting nations must proactively adopt sustainable practices, foster innovation, and seek international cooperation to transform CBAM from a trade barrier into a tool for growth.
While the challenges posed by CBAM are significant, so too are the opportunities it presents for creating a greener, more equitable global economy. By embracing proactive measures and advocating for fairer policies, India and other developing countries can align with sustainable manufacturing and trade practices, ensuring a resilient future that harmonises economic development with environmental stewardship.
Ritesh Kumar Baranwal is a Ph.D. scholar at Jaypee Business School, Noida.
Dr Badri Narayanan Gopalakrishnan is Fellow, NITI Aayog. Views expressed are personal.