The European Union’s Carbon Border Adjustment Mechanism (CBAM) represents a pivotal step in aligning international trade with ambitious climate action. CBAM, a cornerstone of the EU’s “Fit for 55” package, imposes a carbon cost on imports of high-emission goods to prevent carbon leakage and encourage global decarbonization. While the EU aims to achieve climate neutrality by 2050, the implications of CBAM extend far beyond its borders.

CBAM: An Overview

The CBAM is designed to equalise the carbon price between imported and domestically produced goods in the EU. Beginning with a transitional phase from October 2023 to December 2025, importers are required to report embedded emissions for specific goods without financial adjustments. The definitive phase, effective January 2026, mandates surrendering CBAM certificates equivalent to the embedded carbon emissions of imported goods such as cement, steel, aluminum, and fertilizers. By monetizing carbon emissions, the EU intends to drive cleaner production globally.

India, as a significant exporter of carbon-intensive goods to the EU, faces both challenges and opportunities in responding to CBAM. The alignment of its domestic carbon market and industrial policies with global climate norms is essential for maintaining competitiveness while advancing national climate goals.

Impacts on Indian Exports

India’s exports to the EU, particularly in sectors like steel, aluminum, and chemicals are directly impacted by CBAM. These industries contribute significantly to India’s GDP but are also among the most emission-intensive. CBAM introduces compliance requirements that necessitate robust data on embedded emissions, accurate reporting, and eventually payment of carbon costs. For Indian exporters, the mechanism presents a dual challenge:

–Cost Implications: Exporters may need to invest in cleaner technologies to reduce emissions or bear the financial burden of CBAM certificates.

–Market Competitiveness: Compliance with CBAM could increase production costs, potentially making Indian goods less competitive compared to those from nations with established carbon markets.

India’s Response and the Domestic Carbon Market

The Indian government has proactively initiated steps to align with global carbon markets through the Carbon Credit Trading Scheme (CCTS). Established under the Energy Conservation Act, 2001, the CCTS sets emission intensity targets for industries, enabling them to trade carbon credits based on performance. This market-based approach incentivizes emission reductions while promoting industrial decarbonization.

The phased transition of India’s existing Perform, Achieve, and Trade (PAT) scheme into the compliance mechanism under CCTS is scheduled to begin in 2024. This transition will enable industries to adopt a “gate-to-gate” emissions accounting framework, covering both direct and indirect emissions.

Moreover, India’s industrial sectors must embrace carbon accounting and adopt methodologies that align with CBAM’s embedded emissions calculation standards. The availability of high-quality emissions data and alignment with international norms are critical for reducing the risk of trade barriers.

Strategic Opportunities for India

While CBAM poses immediate challenges, it also presents opportunities for India to recalibrate its approach toward sustainable industrial growth:

Technological Upgradation: CBAM incentivizes investments in cleaner production technologies and renewable energy sources. By transitioning to low-carbon alternatives, Indian industries can enhance competitiveness and future-proof exports.

Policy Alignment: Aligning national policies with international frameworks like CBAM not only facilitates compliance but also strengthens India’s negotiating position in global climate forums.

Market Leadership: As a rising leader in sustainability, India can position itself as a preferred supplier to global markets by embedding carbon neutrality into its value chains.

Challenges Ahead

Several challenges persist in aligning India’s industrial framework with CBAM requirements:

• High Decarbonisation Costs: Transitioning to low-carbon technologies requires substantial investments, which may strain small and medium enterprises (SMEs).
• Data and Reporting Gaps: Accurate measurement and reporting of embedded emissions remain a critical hurdle for Indian exporters.
• Policy Integration: The effective integration of national carbon markets with global mechanisms is essential for seamless compliance and reduced trade disruptions.

A Path Toward Net-Zero

India’s ambitious target of achieving net-zero emissions by 2070 hinges on the decarbonization of its industrial and power sectors. CBAM acts as a catalyst, urging India to accelerate its transition toward green energy and sustainable production practices. The introduction of domestic carbon markets like CCTS, complemented by government incentives for clean energy adoption, can provide the necessary framework for industries to adapt.

Collaborative engagement between the government, industry stakeholders, and international partners is vital to address CBAM’s implications holistically. Training programs for exporters, investments in emissions tracking systems, and fostering partnerships for technology transfer are crucial measures to bridge the compliance gap.

The EU’s CBAM exemplifies the intersection of trade and climate policy, compelling nations like India to innovate and adapt. While the mechanism presents immediate challenges for Indian exporters, it also aligns with India’s long-term vision of sustainable development. By leveraging CBAM as an opportunity to strengthen domestic policies, invest in green technologies, and embrace global carbon standards, India can enhance its industrial resilience and achieve its net-zero ambitions.