Topic: EU's Carbon Border Adjustment Mechanism (CBAM)

 

Syllabus Mapping

• GS Paper 3: Conservation, Environmental Pollution and Degradation; Effects of liberalization on the economy.

• GS Paper 2: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

 

Why in News?

From January 1, 2026, the European Union's Carbon Border Adjustment Mechanism (CBAM) enters its definitive "payment phase," effectively imposing a carbon tax on Indian steel and aluminium exports, which could critically erode their competitiveness.

 

Key Highlights:

• The Mechanism:

  • Concept: CBAM acts as an import duty based on the "embedded carbon emissions" generated during the production of goods. It aims to prevent "carbon leakage" (companies moving to countries with weaker climate laws).

  • Calculation: The tax is the difference between the EU Carbon Price (currently ~€80/tonne) and any carbon price already paid in the country of origin. Since India has no explicit carbon tax, exporters pay the full amount.

• Impact on India:

  • Financial Hit: The tax could wipe out 16-22% of the actual price received by Indian exporters. In FY2025 (transition phase), steel and aluminium exports to the EU already declined by 24% due to compliance costs.

  • Sectors Affected: Primarily Steel and Aluminium. Indian steel (Blast Furnace route) emits ~2.4 tonnes of carbon per tonne of steel, making it highly vulnerable compared to greener European steel.

• Compliance Nightmare:

  • Data Auditing: From 2026, emissions data must be verified by auditors approved under ISO 14065. If exporters fail to provide verifiable data, the EU will apply "default values" (usually 30-80% higher than actuals), doubling the tax burden.

Critical Analysis

• Significance (Climate vs. Trade):

  • While presented as a climate tool, CBAM acts as a Non-Tariff Barrier (NTB). It protects EU industries (which are historically the most protected sectors) from competition under the guise of environmentalism.

• Challenges:

  • MSME Exclusion: Large firms may absorb costs, but MSMEs lack the resources for complex "plant-level" carbon accounting. They risk being completely shut out of the EU supply chain.

  • Contractual Power: EU buyers are already forcing Indian suppliers to lower base prices to offset the CBAM tax, effectively transferring the tax burden entirely to Indian manufacturers.

 

Value Addition (Domestic Counter-measure)

• India's Response (CCTS): To mitigate CBAM losses, India is accelerating its own Carbon Credit Trading Scheme (CCTS), notified under the Energy Conservation (Amendment) Act, 2022.

• Strategy: By establishing a domestic carbon market (where carbon is priced), India aims to ensure that the tax is paid domestically rather than to Brussels. This amount could theoretically be deducted from the CBAM liability, keeping the revenue within India.

 

Mains Question

"The EU's Carbon Border Adjustment Mechanism (CBAM) represents a paradigm shift where 'Climate Compliance' becomes the new 'Currency of Trade'." Discuss this statement. How can India's proposed Carbon Credit Trading Scheme (CCTS) mitigate the impact on its manufacturing sector? (15 Marks/250 words)

 

Preliminary Question

Q. With reference to the EU's Carbon Border Adjustment Mechanism (CBAM), consider the following statements:

1. It imposes a carbon tax on all goods imported into the EU, regardless of the sector.

2. The tax liability for an exporter is calculated by deducting the carbon price paid in the country of origin from the EU carbon price.

3. For sectors like steel and aluminium, the mechanism currently covers only Scope 1 (direct) and Scope 2 (indirect) emissions.

4. If an exporter fails to provide verified emissions data, the EU applies the global average emission intensity as the default value.

Which of the statements given above are correct? 

(A) 1 and 4 only 

(B) 2 and 3 only 

(C) 2, 3 and 4 only 

(D) 1, 2 and 3 only

Answer: (B) 

Explanation:

• Statement 1 is incorrect: It initially covers only specific carbon-intensive sectors like Iron & Steel, Aluminium, Cement, Fertilizers, Hydrogen, and Electricity.

• Statement 2 is correct: The mechanism allows for the deduction of explicit carbon costs paid in the exporting country.

• Statement 3 is correct: The article specifies it is a "factory-level accounting system" covering Scope 1 (direct fuel use) and Scope 2 (electricity) emissions, excluding downstream Scope 3 for now.

• Statement 4 is incorrect: The default values applied are "punitive" (often 30-80% above actual emissions), not the global average.