The European Union intends to go carbon-neutral by 2050, with a net-zero-emissions economy that keeps greenhouse gases free and removed from the atmosphere in balance. At the forefront of sustainability, the EU not only introduced carbon-rights trade, but also introduced the Carbon Border Adjusted Mechanism (CBAM), a policy measure to reduce carbon-related regulatory arbitrage associated with international trade. Is. Its main objective is to reduce the price gap between imported goods with less stringent emissions regimes and its domestic products, providing a level playing field by imposing a type of environmental ‘tax’ on imports. The CBAM proposal is expected to be functional by 2026 and subject to levies on imported goods based on carbon-cost equivalents under the European Union’s Emissions Trading System (ETS) to prevent “carbon leakage” and “reduce greenhouse gases”. presents it as a tool for Applies to domestic production. The mechanism is declarative in nature, whereby the authorized declarant importing goods from outside the block has to declare the emissions embedded in the consignment and surrender an equivalent amount of CBAM certificates, which are subject to ETS allowance (or carbon entitlement). will be based. Similar deductions are allowed if the carbon price has already been paid in other jurisdictions. However, the price of CBAM certificates in the region will be based on the weekly average auction prices of ETS allowances. Alternatively, an exporting country may declare a default emission level based on the average. The proposed regulation would initially apply to goods imported from sectors such as iron and steel, aluminium, fertilisers, electricity and cement originating in any third country except Iceland, Liechtenstein, Norway and Switzerland, as these countries are subject to EU ETS coverage. are under.
Over the past 150 years, the European Union has accounted for about 40% of the world’s carbon emissions, while countries like ours have contributed just 2%. Therefore, EU pledges are a matter of concern for developing countries like India. With 14% of India’s exports going to EU countries, CBAM can keep Indian exporters in one place. About 25% of the EU’s iron and steel imports currently come from countries that will take the CBAM wrap, a figure that could shift EU demand in favor of suppliers within the bloc, in exchange for trade with India. can create obstacles in relationships. Exports of iron and steel and aluminum products from India to the EU in 2020-21 were $4 billion and $500 million, respectively.
The proposed measures also appear to be detrimental to Indian imports. The additional cost of CBAM certifications for goods imported by the EU may distort the prices of these goods in downstream industries, affecting the competitiveness of sectors such as automobiles, electrical goods, machinery and equipment. With the introduction of CBAM, importers in the region face an estimated additional €9 billion in carbon costs each year. At present, the block’s share in global exports of the automobile and machinery and electrical sectors is 45% and 25%, respectively. These final goods from the EU could be replaced by Indian-made products, or it could result in dependence on countries like China, raising our concerns of a trade imbalance with the Asian giant.
So far, the EU is concerned about moving carbon-intensive industries to countries with less stringent carbon-mitigation rules. However, high input-cost pressures may prompt downstream regions to migrate outside the union. This will create great opportunities for India’s growth-seeking industrial sector, backed by policy support for a business environment that allows industries to thrive.
While we may have to wait for the commissioning of the CBAM system in 2026 to assess its full effects, we should prepare for it in time. Of the five initial sectors under the EU’s new regulation, iron and steel appears to be the weakest, given that the carbon-emission intensity of Indian steel plants is currently in the range of 2.3–2.8 tonnes for every tonne of crude steel produced. , exceeding the world average of only 1.8 tonnes (according to the World Steel Organisation). India’s nationally determined contribution under the 2015 Paris Agreement aims to reduce the region’s carbon intensity to 2.4 tonnes by 2030, down from 3.1 tonnes in 2005, and the industry is on track to do so. Although almost half of India’s iron and steel production is done through the electric method, which emits less carbon than a traditional oxygen furnace, emissions embedded in the use of coal for energy are still a concern. A more fail-safe approach for the world’s second-largest steel-producing nation would be to become carbon competitive in the medium to long term, while aggressively moving toward sustainable production. A trade agreement with the European Union that takes into account the principle of “common but separate responsibilities” under the Paris Agreement could open up some room for joint but reasonable contributions to the cause of carbon reduction. A trade deal is imminent and will buy time for India to reduce emissions to the desired level.
Developed markets such as the European Union should consider forming technology partnerships with manufacturers in regions similar to ours. This will help reduce perceptions in emerging markets of carbon-control devices acting as tools for trade protectionism.
Certainly, sustainability demands incremental improvement. But implementing jerky changes could only make things worse for all of us.
Ritika Bansal and Jatin Grover are an Indian Economic Service officer and a senior financial advisor respectively
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