Carbon Border Adjustment Mechanism (CBAM)
Why in news?
The EU’s Carbon Border Adjustment Mechanism (CBAM), began its definitive phase on January 1, 2026. It requires importers of carbon-intensive goods like steel, aluminium, cement, fertilizers, and electricity to pay a levy equivalent to the EU’s domestic carbon price, ensuring fair competition and pushing non-EU producers toward cleaner production.
About Carbon Border Adjustment Mechanism
- Purpose: To prevent “carbon leakage” (companies shifting production to countries with weaker climate rules) and to level the playing field for EU industries under the Emissions Trading System (ETS).
- Mechanism: Importers must buy CBAM certificates reflecting the embedded carbon emissions of their products. The price mirrors the EU ETS carbon price.
- Scope: Initially covers steel, aluminium, cement, fertilizers, hydrogen, and electricity imports. More sectors may be added later.
- Timeline:
- 2023–2025: Transitional phase (reporting only, no payments).
- 2026 onwards: Definitive regime with actual payments.
Impact on India and Global Trade
- India’s exports hit: Steel and aluminium exporters face 15–22% price cuts to remain competitive, as EU buyers adjust for CBAM costs.
- Trade negotiations: India is pushing for carve-outs and flexibilities in the upcoming India–EU Free Trade Agreement (FTA) to mitigate CBAM’s impact.
- Revenue shift: EU expects CBAM to generate significant funds while incentivizing cleaner production globally.
Risks & Challenges
- Export competitiveness: Countries like India may lose market share unless they decarbonize production.
- Administrative burden: Accurate emissions reporting and verification are mandatory for exporters.
- Political friction: Developing countries see CBAM as a non-tariff barrier, potentially complicating trade deals.
- Global ripple effect: Other regions (US, UK, Canada) are considering similar mechanisms, which could reshape global trade norms.
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