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Carbon Border Adjustment Mechanism

Context:

India recently flagged concerns relating to sensitive and confidential trade data of its exporters getting compromised while complying with the European Union’s Carbon Border Adjustment Mechanism (CBAM).

Relevance:

GS II: International Relations

Dimensions of the Article:

  1. CBAM – A Policy Tool to Reduce Carbon Emissions
  2. Objectives and Significance of CBAM
  3. Impact of CBAM on India
  4. Conclusion

CBAM – A Policy Tool to Reduce Carbon Emissions

  • CBAM is part of the “Fit for 55 in 2030 package,” which aims to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels in line with the European Climate Law.
  • It is a policy tool aimed at reducing carbon emissions.
How does CBAM work?
  • CBAM will ensure that imported goods are subject to the same carbon costs as products produced within the EU.
  • CBAM will translate into a 20-35 % tax on select imports into the EU starting 1st January 2026.
  • Importers will be required to declare the quantity of goods imported into the EU and their embedded Greenhouse Gas (GHG) emissions on an annual basis.
  • To offset these emissions, importers will need to surrender a corresponding number of CBAM certificates.
  • The price of CBAM certificates will be based on the weekly average auction price of EU Emission Trading System (ETS) allowances in €/tonne of CO2 emitted.

Objectives and Significance of CBAM

Objectives:

  • CBAM aims to ensure that the EU’s climate objectives are not undermined by carbon-intensive imports.
  • It intends to promote cleaner production practices worldwide.

Significance:

  • CBAM can encourage non-EU countries to adopt more stringent environmental regulations to reduce global carbon emissions.
  • It can help prevent carbon leakage by discouraging companies from relocating to countries with weaker environmental regulations.
  • The revenue generated from CBAM will be used to support EU climate policies, which can serve as an example for other countries to support green energy initiatives.

Impact of CBAM on India

CBAM is likely to have a significant impact on India’s exports to the EU, particularly in the following ways:

Adverse impact on exports:

  • India’s exports of metals such as Iron, Steel and aluminum products to the EU will face extra scrutiny under CBAM.
  • India’s major exports to the EU, such as iron ore and steel, face a significant threat due to the carbon levies ranging from 19.8% to 52.7%.

Direct and Indirect Emissions:

  • The carbon intensity of Indian products is significantly higher than that of the EU and many other countries due to coal dominating the overall energy consumption.
  • The proportion of coal-fired power in India is much higher than the EU (15%) and the global average (36%).
  • Therefore, direct and indirect emissions from iron and steel and aluminium are a major concern for India, as higher emissions would translate to higher carbon tariffs to be paid to the EU.

Impact on other sectors:

  • While the impact will initially be felt in a few sectors, it may expand to other sectors in the future, such as refined petroleum products, organic chemicals, pharma medicaments, and textiles, which are among the top 20 goods imported from India by the EU.

Competitive disadvantage:

  • Since India has no domestic carbon pricing scheme in place, it poses a greater risk to export competitiveness, as other countries with a carbon pricing system in place might have to pay less carbon tax or get exemptions.

Conclusion

  • The CBAM is a significant policy initiative aimed at reducing carbon emissions from imported goods and creating a fair-trade environment.
  • While it may have an adverse impact on the exports of some countries, it is intended to promote cleaner production practices worldwide and encourage other countries to adopt stricter environmental regulations.
  • In the long run, it has the potential to reduce global carbon emissions and create a more sustainable future.

-Source: The Hindu


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