Carbon Border Adjustment Mechanism

Free PDF's 31st July 2023

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The European Parliament enacted legislation in April, 2023, to implement the Carbon Border Adjustment Mechanism (CBAM) as part of the EU's Green Deal for reducing greenhouse gas emissions by 55% by 2030.

Introduction to CBAM:

Meaning: CBAM is a proposed mechanism aimed at addressing the issue of carbon leakage, where industries relocate to countries with lax climate policies, leading to an increase in global emissions.
It is designed to prevent carbon leakage by imposing a carbon price on imported goods based on their embedded carbon content.
The European Union (EU) has announced the introduction of CBAM during its transitional phase starting October 2023.

Key Objectives of CBAM:

Protecting domestic industries: CBAM ensures fair competition by imposing carbon emission standards on imported goods, protecting domestic industries from unfair advantages. Imported products with higher carbon footprints face additional costs, levelling the playing field for domestic industries.
Encouraging global emission reduction: CBAM translates into a 20-35% tax on select imports into the EU from 2026. Higher carbon prices on imports motivate non-EU countries to adopt stringent environmental regulations to avoid higher taxes on their exports.
Promoting cleaner production worldwide: Non-EU countries invest in cleaner technologies to reduce emissions and avoid higher carbon costs on exports to the EU market.
Generating revenue for climate policies: Revenue can be invested in renewable energy projects and research, reducing greenhouse gas emissions and combating climate change.

Mechanism of CBAM:

Carbon pricing on imports: CBAM proposes levying a carbon price on certain imported goods based on their carbon content,
Verification and certification: Importers would need to provide information on the embedded carbon content of their goods
Carbon adjustment measures: Importers would be required to pay a carbon adjustment fee if the carbon content of their goods exceeds a predefined threshold.

Potential Benefits of CBAM:

Reduction in carbon leakage: CBAM aims to prevent the relocation of industries to countries with weaker climate policies, thus reducing carbon leakage and maintaining global emission reduction efforts.
Encouraging global climate action: By imposing carbon pricing on imported goods,
Revenue generation: CBAM has the potential to generate revenue for the implementing country, which can be used for climate financing, supporting domestic industries, or investing in clean technologies.

Challenges and Concerns:

Trade disputes: The implementation of CBAM may lead to trade disputes as countries could view it as a protectionist measure or a non-tariff barrier to trade.
Methodology and data accuracy: Determining the carbon content of imported goods accurately can be challenging, and there could be concerns regarding the reliability and transparency of data provided by importers.
Impact on developing countries: CBAM may disproportionately affect developing countries that rely on export-oriented industries, as they may face higher costs and barriers to market access.

India's Implications:

Impact on India's exports: Significant adverse impact on India's exports of metals such as iron, steel, and aluminium products to the EU market.
Increased costs and competitiveness challenges: The carbon levies imposed by CBAM, ranging from 19.8% to 52.7%, could raise the costs of Indian exports,
Vulnerability of sectors: Industries such as refined petroleum products, organic chemicals, pharma medicaments, and textiles, which are among India's top exports to the EU
Implications for employment and economic growth:
Influence on global environmental regulations: CBAM adoption by the EU sets a precedent, influencing the adoption of similar mechanisms worldwide and impacting global environmental regulations and trade practices.

Measures:

Diversify export markets: Explore new non-EU markets to offset the impact of CBAM on Indian exports.
Enhance energy efficiency: Improve energy efficiency in manufacturing to meet EU carbon standards and boost competitiveness.

Invest in low-carbon technologies: Research and develop low-carbon technologies to comply with CBAM and stay competitive.
Strengthen domestic carbon pricing: Implement a domestic carbon pricing mechanism to align with international standards and reduce CBAM impact.
Collaborate with EU on green initiatives: Engage in joint projects with the EU to demonstrate commitment to sustainability and foster cooperation.
Invest in renewable energy infrastructure: Increase investments in renewable energy sources to reduce emissions and enhance competitiveness.

International Cooperation and CBAM:

Need for global consensus: CBAM's effectiveness and fairness require international cooperation and consensus-building to ensure a level playing field and avoid trade tensions.
Climate diplomacy and negotiations: CBAM discussions should be an integral part of international climate negotiations, such as the United Nations Framework Convention on Climate Change (UNFCCC), to ensure fair and equitable implementation.

Conclusion:

CBAM's implementation by the EU carries significant global implications, providing both challenges and opportunities for international collaboration on climate action. With effective dialogue and cooperation, it has the potential to drive sustainable practices and a prosperous future for all.