What is CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is a regulatory framework proposed by the EU to impose a carbon levy on imports from countries with less stringent climate policies. The primary objective of CBAM is to prevent carbon leakage, where companies relocate production to countries with laxer emission standards, undermining the EU’s efforts to reduce its carbon footprint. CBAM will initially apply to high-emission sectors such as cement, steel, aluminum, fertilizers, and electricity.

Key Components of CBAM

Carbon Pricing: Importers will be required to purchase CBAM certificates corresponding to the carbon price that would have been paid if the goods were produced under the EU’s carbon pricing regime.

Scope and Coverage: CBAM will initially target industries with the highest risk of carbon leakage but is expected to expand over time.

Monitoring and Reporting: Importers must report the embedded emissions of their goods and surrender the corresponding number of CBAM certificates.

Gradual Implementation: CBAM will be phased in gradually, allowing businesses time to adapt to the new requirements.

Potential Impact on India

India, with its significant exports to the EU, particularly in sectors like steel, aluminum, and chemicals, will be directly impacted by CBAM. Here are the key areas of impact:

Increased Costs for Exporters: Indian exporters in covered sectors will face additional costs due to the need to purchase CBAM certificates. This could erode their price competitiveness in the EU market.

Pressure to Decarbonize: CBAM will incentivize Indian industries to adopt cleaner technologies and reduce their carbon emissions to remain competitive.

Market Access Challenges: Non-compliance with CBAM requirements could result in restricted access to the EU market, affecting trade volumes and revenues.

Supply Chain Adjustments: Indian companies may need to reassess their supply chains and possibly shift to low-carbon inputs and processes.

Strategic Responses for Indian Industries

To mitigate the impact of CBAM, Indian industries can adopt several strategies:

Investing in Green Technologies: Investing in energy-efficient and low-carbon technologies can help reduce the carbon footprint of Indian exports, making them more compliant with CBAM requirements.

Enhancing Transparency and Reporting: Establishing robust mechanisms for monitoring, reporting, and verifying carbon emissions will be crucial. This will not only ensure compliance but also build trust with EU partners.

Engaging in Policy Dialogue: The Indian government and industry bodies should engage in dialogue with EU counterparts to seek clarifications, negotiate terms, and explore potential exemptions or support mechanisms.

Exploring New Markets: Diversifying export markets to reduce dependence on the EU can help mitigate risks associated with CBAM.

Collaborating for Innovation: Collaborating with global partners on research and development can accelerate the adoption of sustainable practices and technologies.

Government Initiatives and Support

The Indian government can play a pivotal role in supporting industries through:

Policy Support: Formulating policies that encourage decarbonization and provide incentives for adopting green technologies.

Financial Assistance: Offering financial support and subsidies for investments in clean energy and low-carbon technologies.

Capacity Building: Providing training and resources to help industries understand and comply with CBAM requirements.

International Negotiations: Engaging in international negotiations to ensure that CBAM implementation is fair and considers the developmental needs of emerging economies.