How India could Counter the CBAM

What is the EU’s Carbon Border Adjustment Mechanism (CBAM)?

• Purpose of CBAM: The Carbon Border Adjustment Mechanism (CBAM) is designed to impose a fair price on carbon emissions associated with the production of carbon-intensive goods entering the EU.
  • It aims to promote cleaner industrial practices in non-EU countries.
• Carbon Pricing: CBAM ensures that the carbon price applied to imports is equivalent to the carbon price imposed on goods produced within the EU, thereby maintaining fair competition.
• Functioning Framework:
  • Registration and Certification: EU importers of CBAM-covered goods must register with national authorities and acquire CBAM certificates that reflect the carbon emissions embedded in their imports.
  • Annual Declaration: Importers are required to declare the emissions associated with their imported goods and surrender the corresponding number of certificates each year.
  • Payment of Carbon Price: Importers must demonstrate that a carbon price has already been paid during the production of goods in a non-EU country to receive a deduction from their CBAM payment.
• Goods Covered by CBAM: Initially, CBAM targets high-risk carbon leakage goods, including:
  • Cement
  • Iron and steel
  • Aluminium
  • Fertilisers
  • Electricity
  • Hydrogen
• Over time, CBAM is expected to encompass more than 50% of emissions from sectors included in the EU Emissions Trading System (ETS), such as oil refineries and shipping.

• Impact on Indian Exports: The EU accounts for approximately 20.33% of India’s total merchandise exports, with 25.7% of these exports affected by CBAM.
  • In the last five fiscal years, iron and steel have constituted 76.83% of these exports, followed by aluminium, cement, and fertilisers.

India’s Criticism

• Arbitrary Nature: India’s Finance Minister Nirmala Sitharaman described CBAM as “unilateral and arbitrary,” arguing that it imposes unfair burdens on developing countries that are still industrialising.
• Discriminatory Tool: India asserts that CBAM functions as a non-tariff barrier that undermines existing trade agreements and disproportionately impacts developing economies.
  • The mechanism could lead to tariffs ranging from 20% to 35% on carbon-intensive goods such as steel and aluminium.

Economic Implications

• Trade Competitiveness: The imposition of CBAM could significantly increase costs for Indian exporters, making their products less competitive in the EU market.
  • g., iron and steel exports to the EU are vital for India’s economy, and any additional tariffs could reduce demand.
• Potential Revenue for the EU: The revenues generated from CBAM are expected to fund the EU’s climate initiatives, estimated to be between €5 billion to €14 billion annually by 2030.
  • India questions the fairness of this revenue not being shared with non-EU trading partners.

Proposed Indian Arguments at COP29

• Preparation Time:
  • The EU achieved its targets gradually:
    • 2020: 20% GHG emissions reduction compared to 1990 levels (EU Climate Action and Renewable Energy Package, 2008).
    • 2019: Extended target to 55% below 1990 levels under the European Green Deal and Fit for 55 Package.
  • India could question whether CBAM allows developing countries comparable adaptation time.
• Revenue Sharing:
  • Estimated Revenue: CBAM is expected to generate €5–14 billion annually by 2030.
  • Use of Funds: Revenues will fund the NextGenerationEU recovery tool and operate CBAM.
  • Indian Argument: Advocate for sharing CBAM revenues with non-EU trading partners to:
    • Build capacity.
    • Facilitate technology transfer in developing nations.
  • Alternative Framework: Equity-Based Accounting (EBA):
    • Principles: Advocates a shared obligation for emission reductions among trade partners, emphasising:
      • Horizontal intra-generational equity: Fair distribution within the current generation.
      • Vertical inter-generational equity: Fairness to future generations.
  • Proposal:
    • Develop a tariff formula for EU imports considering:
      • Per capita GDP.
      • Per capita emissions.
      • Trade benefits.
      • Avoided emissions through trade.
  • Justice in Emission Responsibilities:
    • CBAM violates principles of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC).
    • It ignores:
      • Compensatory justice: Addressing historical contributions to climate change.
      • Distributive justice: Assigning equitable emission responsibilities.

Broader Context

• Global Response Coordination: India has called for a coordinated response among developing nations to address what it sees as an unjust transfer of responsibilities imposed by developed countries through mechanisms like CBAM.
• Concerns Over Multilateral Trade Relations: The imposition of CBAM could lead to trade wars or retaliatory measures among nations, further complicating international trade dynamics.

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