Editorial 2 : Carbon-linked Trade
Context:
The European Union’s extension of the Carbon Border Adjustment Mechanism (CBAM) to imports poses fresh economic and regulatory challenges for Indian exporters, particularly in carbon-intensive sectors.
Introduction
Global trade is increasingly intersecting with climate policy, reshaping market access conditions for exporters. The EU’s Carbon Border Adjustment Mechanism marks a significant shift where carbon intensity becomes a determinant of trade competitiveness. From 2026, Indian exports of steel and aluminium to the EU will attract a carbon-linked levy, potentially raising costs by 16–22 per cent. While the stated objective is climate mitigation, the move has far-reaching implications for developing economies like India that rely on cost-efficient but carbon-intensive production processes.
- Carbon Border Adjustment Mechanism (CBAM):
- CBAM imposes a carbon price on imports equivalent to what EU producers pay under the EU Emissions Trading System (ETS).
- Initially covering steel, aluminium, cement, fertilisers, electricity and hydrogen, it may expand to other sectors, altering global trade norms.
- Impact on Indian Export Competitiveness
- The EU accounts for nearly 22% of India’s steel and aluminium exports, making CBAM economically significant.
- Higher compliance costs may erode profit margins, reduce price competitiveness, or lead to market displacement by exporters from cleaner-production economies.
- Equity Concerns and Climate Justice
- CBAM applies developed-country carbon standards to developing economies, conflicting with the principle of Common But Differentiated Responsibilities (CBDR) under the UNFCCC.
- According to UNCTAD, CBAM may reduce global emissions by only 0.1%, while disproportionately affecting developing-country exports.
- Trade Protectionism vs Climate Action
- Steel and aluminium are already among the most protected sectors globally, with tariffs and non-tariff barriers.
- CBAM risks functioning as a green trade barrier, shielding EU industries while shifting adjustment costs onto exporters from the Global South.
- Expanding Global Precedent
- The UK’s proposal for a similar mechanism suggests carbon-linked trade measures could become a global norm.
- This increases long-term uncertainty for Indian exporters across multiple sectors beyond metals.
- Domestic Industrial and Technological Constraints
- Indian industries rely heavily on coal-based energy and legacy technologies, making rapid decarbonisation capital-intensive.
- Limited access to affordable green finance and technology transfer constrains swift compliance.
Forward
- Strategic Trade Negotiations
- India should seek sector-specific carve-outs, transition periods, or mutual recognition mechanisms in ongoing EU–India FTA negotiations.
- Diplomatic engagement must emphasise climate equity and development concerns.
- Accelerating Green Industrial Transition
- Targeted incentives for green steel, energy-efficient furnaces, and low-carbon aluminium can reduce long-term exposure.
- Aligning industrial policy with Nationally Determined Contributions (NDCs) will strengthen credibility.
- Carbon Accounting and Standards Development
- Developing robust domestic carbon measurement, reporting and verification (MRV) systems will help exporters demonstrate compliance.
- Harmonisation with global standards can reduce information asymmetries.
- Financial and Policy Support for Exporters
- Providing viability gap funding, concessional green credit, and technology upgradation schemes can cushion short-term shocks.
- MSMEs in export supply chains require special support to avoid exclusion.
- India should raise CBAM-related concerns at WTO and UN climate forums, pushing for rules that balance trade and sustainability.
- Collective action with other developing countries can strengthen negotiating leverage.
Conclusion
CBAM signals a structural shift where climate policy and trade are increasingly intertwined. While decarbonisation is a global imperative, its burden cannot be unevenly transferred to developing economies. For India, the challenge lies in protecting export competitiveness while accelerating a credible green transition. A calibrated mix of diplomacy, domestic reform, and international cooperation is essential to ensure that climate action does not become a new form of trade exclusion.