Context:

• The European Union(EU)’s Carbon Border Adjustment Mechanism (CBAM) policy intends to tax carbon-intensive products coming into the EU from 2026. There is a concern that this mechanism could have serious implications on the Indian Manufacturing sector.

Carbon Border Adjustment Mechanism (CBAM)

• Aim is to reduce EU greenhouse gas emissions by 55% (2030) compared to 1990 levels and prevent carbon leakage (production shift to non-EU countries).
• Mechanism: Tax carbon-intensive imports (iron, steel, aluminium, etc.) based on embedded emissions.
• Phases: Transitional (reporting, 2023-2025), Definitive (taxation, 2026+).
• Carbon Leakage is a strategy whereby carbon-intensive production by EU-based producers is moved to non-EU countries with lax environmental regulations. 

Impacts on India:

• India will be one of the top 8 most affected countries as 27% of India’s iron, steel, aluminium exports to EU (valued at $8.2 billion) is at risk.
• Drop in exports can lead to other problems like,
  • Increase in unemployment.
  • Shrinking of Forex reserves.

Solutions Available to India:

• The first would be to challenge the practice as being violative of the common but differentiated responsibilities principle agreed upon under the Paris Agreement. 
  • India has already challenged the CBAM before the World Trade Organization under the special and differential treatment provisions.
• Second, the EU could collect the tax and return the funds to such countries to invest in their green technologies.
• Third is to formulate its own carbon taxation measures that align with the principles of the Paris Agreement while simultaneously safeguarding its industries’ interests. 
  • In this direction, the Indian Parliament  amended the Energy Conservation Act, 2001, to introduce the Carbon Credit Trading System (CCTS).
  • In India’s mechanism, the obligatory CCTS model is also coupled with the voluntary market-based mechanism called the Green Credit Programme Rules, notified by the Ministry of Environment in 2023. Additional points:

On the whole, CBAM poses significant challenges for Indian exports. Considering the fact that it comes to a definitive phase by 2026, it is imperative for India to swiftly negotiate the issue with the EU.