Carbon Border Adjustment Mechanism

About

Carbon Border Adjustment Mechanism (CBAM) is part of the “Fit for 55 in 2030 package”, which is the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels in line with the European Climate Law.
The CBAM is a policy tool aimed at reducing Carbon Emissions by ensuring that imported goods are subject to the same carbon costs as products produced within the EU.

The CBAM will be implemented by requiring importers to declare the quantity of goods imported into the EU and their embedded Greenhouse Gas (GHG) emissions on an annual basis.
To offset these emissions, importers will need to surrender a corresponding number of CBAM certificates, the price of which will be based on the weekly average auction price of EU Emission Trading System (ETS) allowances in €/tonne of CO2 emitted.

CBAM will ensure its climate objectives are not undermined by carbon-intensive imports and spur cleaner production in the rest of the world.

It can encourage non-EU countries to adopt more stringent environmental regulations, which would reduce global carbon emissions.
It can prevent carbon leakage by discouraging companies from relocating to countries with weaker environmental regulations.
The revenue generated from CBAM will be used to support EU climate policies, which can be learned by other countries to support Green Energy.

It will have an adverse impact on India’s exports of metals such as Iron, Steel, and aluminum products to the EU because these will face extra scrutiny under the mechanism.
India’s major exports to the EU, such as iron ore and steel, face a significant threat due to the carbon levies ranging from 19.8% to 52.7%.
From 1^st January 2026, the EU will start collecting the carbon tax on each consignment of steel, aluminum, cement, fertilizer, hydrogen, and electricity.

The carbon intensity of Indian products is significantly higher than that of the EU and many other countries because coal dominates the overall energy consumption.
The proportion of coal-fired power in India is close to 75%, which is much higher than the EU (15%) and the global average (36%).
Therefore, direct and indirect emissions from iron and steel and aluminium are a major concern for India as higher emissions would translate to higher carbon tariffs to be paid to the EU.

It will initially affect a few sectors but may expand to other sectors in the future, such as refined petroleum products, organic chemicals, pharma medicaments, and textiles, which are among the top 20 goods imported from India by the EU.
Since India has no domestic carbon pricing scheme in place, this poses a greater risk to export competitiveness, as other countries with a carbon pricing system in place might have to pay less carbon tax or get exemptions.

On the domestic front, the government has schemes like the National Steel Policy and the Production Linked Incentive (PLI) scheme, which aim to increase India’s production capacity, but carbon efficiency has been out of the objectives of such schemes.
The government can complement these schemes with a Decarbonization Principle.
Decarbonization refers to the process of reducing or eliminating greenhouse gas emissions, especially carbon dioxide (CO₂), from human activities such as transportation, power generation, manufacturing, and agriculture.

India could negotiate with the EU to recognize its energy taxes as equivalent to a carbon price, which would make its exports less susceptible to CBAM.
For example, India could argue that its tax on coal is a measure to internalize the costs of carbon emissions and, therefore, equivalent to a carbon tax.

India should negotiate with the EU to transfer clean technologies and financing mechanisms to aid in making India’s production sector more carbon efficient.
One way to finance this is to propose to the EU to set aside a portion of its CBAM revenue to support India’s climate commitments.
Besides, India should also begin preparing for the new system just as China and Russia are doing by establishing a Carbon Trading System.

Global Biofuel Alliance	National Green Hydrogen Mission
Global Methane Pledge	Carbon Credit Programme