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EU’s Carbon Border Adjustment Mechanism

By Amigos IAS

Why is it in the news?

  • The European Union’s Carbon Border Adjustment Mechanism (CBAM) raises concerns for India, necessitating the formulation of indigenous carbon taxation measures.

About Carbon Border Adjustment Mechanism (CBAM)

  • EU’s tool to price carbon emitted during the production of carbon-intensive goods entering the EU.
  • Targets goods at risk of carbon leakage, such as cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen.
  • CBAM imposes a 20-35% tax on select imports into the EU, effective from January 1, 2026.
  • Aligns with the EU’s target of a 55% reduction in Greenhouse Gas (GHG) emissions by 2030 under the European Green Deal.

Significance:

  • Serves as a carbon pricing mechanism, discouraging emissions in the production process.
  • A trade-related measure that affects production and exports, equalizing the price of carbon between domestic and imported products.

Issues (According to UNCTAD)

  • Russia, China, and Turkey identified as most exposed to CBAM.
  • India, Brazil, and South Africa deemed most affected among developing countries.
  • Mozambique highlighted as the most exposed least-developing country.

Challenges for India with CBAM

  • India’s exports of carbon-intensive products (mainly aluminium and iron-and-steel) face burdensome green reporting rules, acting as a trade barrier.
  • 6% of India’s exports (iron ore pellets, iron, steel, and aluminium products) worth $7.4 billion in 2023 to the EU are affected.
  • Steel and aluminium exports, contributing nearly 14% to India’s export mix, face substantial uncompetitiveness.
  • CBAM and international climate policies may have a significant impact on India’s trading relationships and Balance of Payments.

 

Options Available to India

  • The Carbon Credit and Trading Scheme (CCTS):It was notified by the Union Government under the Energy Conservation Act, 2001, to develop the country’s first-ever domestic carbon market. It was set up as the regulatory framework for the Indian Carbon Market (ICM), with BEE as the administrator.
  • It envisioned the formation of a National Steering Committee for Indian Carbon Market (NSCICM)for the governance and direct oversight of the Indian Carbon Market (ICM). The committee will be chaired by the Secretary (Ministry of Power); and co-chaired by the Secretary (Ministry of Environment, Forests and Climate Change).
  • BEE will be the administrator for the ICM and will be responsible for the development of the GHG emissions trajectory and the targets for the entities to be obligated under the notification.
  • The Central Electricity Regulatory Commission (CERC) will be the regulator for the trading of carbon credit certificates.

 

Types of Carbon Markets:

·       Compliance Markets: These are created as a result of any national, regional and/or international policy or regulatory requirement.

·       Voluntary Carbon Markets (National and International): These refer to the issuance, buying and selling of carbon credits, on a voluntary basis.

 

  • It will have to be generated and bought by domestic and overseas markets and will not be applicable to the voluntary carbon market. Under the Paris Agreement of 2015, India has pledged to reduce the emissions intensity of its GDP by 45% by 2030, from the 2005 level.

 

Way Forward

 

  • Implementing a carbon tax provides a source of revenue for the government, contributing to national finances.
  • A well-structured carbon tax creates a financial incentive for industries to adopt cleaner and more sustainable technologies, reducing carbon emissions.
  • By aligning with global environmental standards through a carbon tax, India can enhance its international competitiveness and attract environmentally conscious investments.
  • India’s commitment to reduce the carbon intensity of its GDP by 33-35% by 2030 sets clear targets for environmental sustainability.

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