CBAM (Syllabus: GS Paper 2 – IR)

Context: With the United Kingdom (UK) recently preparing to roll out a carbon levy for goods entering the country, India is negotiating ardently for the proposed free trade agreement (FTA) between the two nations to include provisions that may offer some relief to its exporters.

• The UK intends to implement the CBAM, commonly known as a carbon tax, within the next two to three years as part of its climate change mitigation efforts.

Carbon Border Adjustment Mechanism (CBAM)

• About: It is a tariff on imports that is calculated based on the carbon emissions associated with the production of the imported product.
• CBAM is a component of the "Fit for 55 in 2030 package," which is the European Union's initiative to reduce greenhouse gas emissions by a minimum of 55% by 2030 in comparison to 1990 levels.
• Dual Purpose: it serves as a financial disincentive for carbon emissions and influences production and export activities.
• The CBAM is scheduled to commence its transitional phase on 1 October 2023, with the permanent system set to become effective on 1 January 2026.

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.