EU’s Carbon Border Adjustment Mechanism (CBAM)
Source: Understanding the EU’s carbon border tax (The Hindu, January 9, 2024)
- Phase Introduction: Starting on October 1, 2023, the EU’s new carbon tax policy begins. It comes in two stages. The first is the transition phase. India is talking to the EU about this policy.
- Purpose of CBAM: The EU wants to cut its greenhouse gas emissions by 55% by 2030. This goal is set against 1990 levels. The CBAM is part of their plan. It is under the European Green Deal.
- Protecting EU Industries: EU industries have to follow strict environmental rules. This makes their goods more expensive. Because of that, cheaper products from countries like India may take their place in the market. The CBAM will tax these cheaper imports. This helps the EU reach its emission goals. It also helps their industries stay competitive.
- EU Emission Trading System (ETS): The CBAM is similar to the EU’s Emission Trading System (ETS). The EU-ETS sets limits on GHG emissions. Companies have to buy the right to emit GHGs. They get financial rewards for reducing emissions. Some industries get free emissions rights to stay competitive. This prevents companies from moving to countries with weaker environmental laws.
- CBAM Transition: The CBAM will start with a transitional period until December 2025. During this time, EU manufacturers and importers must report their GHG emissions. They won’t have to pay for these emissions yet.
- Definitive Phase: Starting January 1, 2026, the CBAM will require payments. Importers will have to buy CBAM certificates that match their GHG emissions each year.
India’s Carbon Trading Initiative
- Introduction of CCTS: India has introduced a Carbon Credit Trading System. This happened in December 2022 by updating the Energy Conservation Act, 2001.
- Carbon Valuation Development: The Ministry of Power in India is detailing how to value and manage carbon emissions under CCTS.
- Enacting the Programme: As of 2023, India has a voluntary Green Credit Programme. It’s designed to stimulate extra environmental efforts.
- Purpose: The aim is to inspire actions that exceed mandatory carbon reduction.
India’s Strategies Against EU’s CBAM
- Legal Challenge: India may contest the CBAM’s alignment with the Paris Agreement principles. The policy could be at odds with the agreement’s commitment to differentiated responsibilities.
- Financial Redistribution: The EU could offset the tax impact by funding green technology in affected countries. This approach would use CBAM revenues to foster sustainable practices.
- Need for Indian Carbon Tax: India should establish a carbon taxation system. The system would need to respect the Paris Agreement and protect local industries.
U.K.’s CBAM Impact on India
- Anticipated Disruptions: The U.K.’s CBAM is set for enforcement by 2027. This move could disrupt Indian exports significantly, which calls for prompt action from India.
- Urgency for Action: With limited time before these measures take effect, India must respond quickly to mitigate potential negative impacts on its exports.