The global transition to low-carbon economies has added a new dimension to international trade. One of the most debated instruments in this context is the Carbon Border Adjustment Mechanism (CBAM) introduced by the European Union (EU). CBAM seeks to level the playing field between EU industries and foreign competitors by imposing a carbon price on imports of certain goods. While the EU defends CBAM as a climate-friendly initiative, critics see it as a form of green protectionism.
For India, a developing economy with substantial exports to the EU, CBAM carries significant implications—not just for trade but also for climate diplomacy and domestic policy.
What is CBAM?
The Carbon Border Adjustment Mechanism is a policy tool designed to prevent “carbon leakage.” Carbon leakage occurs when industries relocate to countries with laxer emission standards, thereby undermining global climate goals. CBAM aims to address this by charging a carbon price on imported goods equivalent to what EU companies pay under the EU Emissions Trading System (ETS).
Initially, CBAM targets five carbon-intensive sectors:
- Iron and steel
- Cement
- Aluminium
- Fertilisers
- Electricity
The transitional phase began in October 2023, and by 2026, full implementation will commence with actual carbon tariffs levied on imports.
Impact on India’s Trade
India is a significant exporter of products like iron, steel, and aluminium to the EU—sectors directly targeted by CBAM. Here’s how it may affect India:
1. Export Competitiveness
Indian firms currently don’t face carbon pricing at home. With CBAM, their exports to the EU could become costlier, reducing competitiveness compared to EU-based producers or firms in countries with carbon pricing mechanisms.
2. Increased Compliance Costs
To comply with CBAM’s reporting and verification requirements, Indian exporters will have to invest in emissions accounting, monitoring, and possibly cleaner technology. This may strain MSMEs and less-prepared industries.
3. Shift in Trade Flows
CBAM may lead to trade diversion, with Indian exporters shifting away from the EU to markets with fewer environmental barriers. This can disrupt supply chains and affect foreign exchange earnings.
Climate Policy Implications for India
While India has committed to net zero by 2070, its climate strategy emphasizes equity and common but differentiated responsibilities (CBDR). CBAM challenges this paradigm in several ways:
1. External Pressure for Domestic Carbon Pricing
Although India currently avoids economy-wide carbon pricing, CBAM may pressure it to adopt mechanisms like carbon markets or carbon taxes to retain export competitiveness and revenue.
2. Acceleration of Green Industrial Policies
CBAM may act as a wake-up call, prompting India to push for:
- Clean energy integration
- Hydrogen economy development
- Industrial decarbonization (especially in steel and cement)
- Faster rollout of the Indian Carbon Market (ICM)
3. Concerns of Climate Justice
India has long argued that developing countries need “policy space” to grow. CBAM effectively penalizes developing countries for emissions while developed countries continue to consume carbon-intensive goods. This raises ethical and diplomatic challenges.
Negotiation and Diplomatic Challenges
India, along with other developing nations, has criticized CBAM at the WTO and UNFCCC forums, arguing that it violates:
- Trade rules under the WTO (e.g., Most Favoured Nation and National Treatment principles)
- The Paris Agreement’s spirit of climate equity
India’s key diplomatic stances:
- CBAM is a unilateral measure that could spark a trade war.
- It reflects a form of “green trade barrier” rather than genuine climate cooperation.
- Rich countries should focus on climate finance and technology transfer instead of punitive measures.
India has also coordinated with countries like China, South Africa, and Brazil to challenge CBAM’s fairness and legality.
India’s Response Strategy
To mitigate CBAM’s impact, India needs a multi-pronged strategy:
1. Accelerate Carbon Market Development
India is developing its Carbon Credit Trading Scheme (CCTS). A credible domestic carbon market can help Indian exporters offset EU charges and create a revenue stream.
2. Boost Green Technology Investment
Through PLI schemes and initiatives like National Green Hydrogen Mission, India can promote cleaner production in CBAM-affected sectors.
3. Negotiate Bilateral Adjustments
India may explore bilateral agreements with the EU for mutual recognition of carbon measures or sectoral exemptions.
4. Support Affected Industries
Targeted support for MSMEs, exporters, and high-emission industries can ease the compliance burden and avoid job losses.
Conclusion
The Carbon Border Adjustment Mechanism marks a new phase in the intersection of trade and climate policy. While it reflects the EU’s climate ambitions, it also raises legitimate concerns for developing countries like India.
For UPSC aspirants, CBAM offers a rich case study in:
- Climate diplomacy
- WTO norms vs. environmental policy
- The future of green industrial strategy
India must now strike a balance between safeguarding economic interests and aligning with global climate goals. Whether CBAM becomes a tool for cooperation or conflict depends on how nations negotiate the green transition