EU‘s carbon border adjustment mechanism (CBAM)

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Last Updated30/07/2021

In G-20 ministerial meeting on environment and climate change in Italy, developing countries, including India, are expected to raise their concerns over the European Union’s (EU’s) recent proposal on the first of its kind “Carbon Border Tax”.
In December 2019, the EU proposed to introduce a carbon border adjustment mechanism (CBAM), a form of carbon pricing on imports into the EU, as part of the European Green Deal.

In March 2021, the EU Parliament had adopted a resolution to implement a ‘Carbon Border Adjusted Mechanism’ (CBAM).
The E.U. proposal still needs to be negotiated among the 27 member countries and the European Parliament before becoming law.

The EU is at the forefront of international efforts to fight climate change.
EU's ambitious target of a 55% reduction in carbon emissions compared to 1990 levels by 2030, and to become a climate-neutral continent by 2050.
As part of these efforts, the Carbon Border Adjustment Mechanism (CBAM) is a climate measure that should prevent the risk of carbon leakage and support the EU's increased ambition on climate mitigation, while ensuring WTO compatibility.
Carbon leakage can shift emissions outside of Europe and therefore seriously undermine EU and global climate efforts.
The CBAM will equalise the price of carbon between domestic products and imports.
The CBAM will help reduce the risk of carbon leakage by encouraging producers in non-EU countries to green their production processes.

Designed in compliance with World Trade Organization (WTO) rules and other international obligations of the EU, the CBAM system will work as follows:

EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU's carbon pricing rules.
Once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer.

The idea behind the tax is to disincentivize companies outside the European Union that are exporting to the EU four carbon extensive goods: steel, cement, fertilizers and aluminium.
Under the proposal, importers will be required to buy digital certificates representing the t onnage of carbon dioxide emissions embedded in their imported goods.
The E.U. is now proposing to tighten that cap further, while phasing out the number of free allowances it has long given to industries exposed to trade competition, like steel.
Companies abroad that want to sell cement, iron, steel, aluminum, fertilizer or electricity to the E.U. would also be required to pay that price for each ton of carbon dioxide they emit in making their products. The idea is to level the carbon playing field.
The border tax would not take effect until 2026.

It refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints.
This could lead to an increase in their total emissions.

The countries to be worst affected will be Russia, Britain, Ukraine, Turkey and China which collectively export large amounts of fertilizer, iron, steel and aluminum to the European Union.

Indian goods will be costlier: By increasing the prices of Indian-made goods in the EU, this tax would make Indian goods less attractive for buyers and could shrink demand.
Challenges for companies with large GHG footprint: The tax would create serious near-term challenges for companies with a large greenhouse gas footprint–and a new source of disruption to a global trading system already impacted by tariff wars, renegotiated treaties, and rising protectionism.
India’s third-largest trading partner, the EU accounts for 11.1% of India’s total global trade.