Article 3: Carbon Border Adjustment Mechanism (CBAM)
Why in news: The Carbon Border Adjustment Mechanism (CBAM) has gained prominence as the European Union began its transitional reporting phase in October 2023, with full financial implementation scheduled from January 2026. India and other developing countries have raised concerns at WTO platforms, arguing that CBAM may act as a trade-restrictive measure affecting exports of carbon-intensive goods.
Key Details
- Carbon Border Adjustment Mechanism (CBAM) is a policy instrument that places a carbon price on importsequivalent to the carbon cost borne by domestic producers under emission trading systems.
- It targets carbon-intensive and trade-exposed sectors, initially covering iron and steel, aluminium, cement, fertilisers, electricity and hydrogen.
- The mechanism follows a two-phase implementation: an initial transitional phase focused on emission reporting, followed by a full compliance phase involving financial obligations.
- Importers are required to calculate and report embedded greenhouse gas emissions using prescribed methodologies, with default values applied where verified data is unavailable.
- The payable carbon charge allows adjustment for any explicit carbon price already paid in the country of origin, aiming to avoid double taxation.
Design and Operational Framework of CBAM
- Legal Basis: CBAM is established under EU Regulation 2023/956, forming a core pillar of the European Green Deal and the Fit for 55 package aimed at reducing EU emissions by 55% by 2030.
- Objective:
- Prevent carbon leakage
- Ensure a level playing field between EU and non-EU producers
- Incentivise global decarbonisation beyond EU borders
- Coverage of Goods:
- Applies to carbon-intensive and trade-exposed sectors such as steel, aluminium, cement, fertilisers, electricity and hydrogen
- Selected based on emission intensity and risk of relocation
- Phased Implementation:
- Transitional Phase (Oct 2023–Dec 2025):
- Only emission reporting, no financial payment
- Definitive Phase (from Jan 2026):
- Mandatory purchase of CBAM certificates linked to EU-ETS prices
- Carbon Pricing Mechanism:
- Price of CBAM certificates equals the weekly average EU-ETS allowance price
- Avoids double taxation by allowing deduction for carbon price paid in exporting country
- Measurement & Reporting (MRV):
- Embedded emissions calculated using EU-prescribed methodologies
- Default values applied if verified data is unavailable
- Raises concerns for developing countries with limited MRV capacity
Implications, Concerns and Global Ramifications
- Impact on Developing Countries:
- Higher export compliance costs
- Potential erosion of comparative advantage
- Disproportionate impact on MSMEs and low-income economies
- India-Specific Concerns:
- Affects key export sectors such as steel, aluminium and cement
- India argues CBAM violates CBDR principle under UNFCCC
- Termed as a form of “green protectionism” in WTO discussions
- WTO Compatibility Debate:
- EU claims CBAM complies with Article I (MFN) and Article III (National Treatment)
- Critics argue it may conflict with Special and Differential Treatment (SDT) provisions
- Climate Finance & Equity Issues:
- CBAM revenue accrues to the EU budget, not earmarked for climate finance
- Developing countries demand revenue recycling towards adaptation and technology transfer
- Global Precedent:
- Sets a template for similar mechanisms proposed by USA, UK and Canada
- Signals emergence of climate-conditioned trade architecture
Way Forward
For India:
- Develop a domestic carbon market aligned with global standards
- Improve carbon accounting and MRV systems (Measurement, Reporting, Verification)
- Negotiate mutual recognition of carbon pricing mechanisms with the EU
- Push for technology transfer and climate finance as per Paris Agreement obligations
At the global level:
- Strengthen multilateral dialogue at WTO
- Ensure climate measures do not become disguised protectionism
- Support capacity-building for developing countries
Policy alignment between trade and climate regimes is essential to ensure equity and effectiveness.
Conclusion
The Carbon Border Adjustment Mechanism reflects a growing shift towards climate-linked trade policies. While it may help reduce global emissions, its unilateral design risks burdening developing economies like India. A balanced approach - rooted in multilateralism, climate justice, and shared responsibility is crucial to ensure that global climate action remains inclusive and fair, rather than fragmenting international trade.
Descriptive question:
Q. “Carbon Border Adjustment Mechanism (CBAM) aims to address carbon leakage, but its design raises concerns regarding equity, trade protectionism and the principle of Common but Differentiated Responsibilities (CBDR). Discuss in the context of India and developing countries.” (250 words, 15 marks)