An Overview of the Carbon Border Adjustment Mechanism (CBAM)

The European Union (EU) is set to roll out the Carbon Border Adjustment Mechanism (CBAM) to place a reasonable cost on the carbon emissions generated during the production of carbon-intensive goods imported into the EU. This move aims to promote greener industrial production in non-EU countries.

• The EU intends to gradually introduce CBAM from 1st October 2023, which will result in a 20-35% tax on selected imports into the EU nations by 1st January 2026.
• Starting 1st January 2026, the EU will begin imposing the carbon tax on various products exported to the EU.
• The range of products included in the CBAM list will be progressively expanded, and by 2034, it will encompass all products entering the EU.

Further Reading: Environmental Taxes

The Effect of CBAM on India

• The introduction of CBAM is likely to adversely affect the global trade of developing nations, with India being particularly impacted.
• In 2022, 27% of India’s total export in iron, steel, and aluminium products, valued at USD 8.2 billion, was destined for the EU.
• Under this mechanism, from 1st October 2023, India’s export of iron and aluminium to EU nations will face additional scrutiny.
• The tariffs for iron, steel, and aluminium products will be elevated to 20-35 percent, surpassing the EU’s agreed bound tariff rate of 2.2 percent for its manufacturers at the World Trade Organization (WTO). This is likely to escalate costs and lead to a significant loss in export revenues.
• While fertilizers, cement, and electrical energy are other products that will be affected, India’s export of these items to the EU is minimal, thereby mitigating the impact on the country.
• As the EU incorporates more items into the CBAM list post 1st January 2026, Indian exporters are expected to bear a greater brunt.

A Look Ahead

• A task force needs to be established to equip the ministries and the industry to navigate the challenges of CBAM.
• It is crucial to educate all industry players involved in the steel and aluminium sector to meet the 1st October deadline.
• India should consider setting up a carbon market.