Context:
The European Union’s Carbon Border Adjustment Mechanism (CBAM) is set to impose carbon-linked import taxes on selected goods from 2026, posing significant challenges for Indian steel and aluminium exporters and necessitating targeted government support.
Key Highlights:
- What is CBAM?
- CBAM is a carbon taxation mechanism that levies duties on imports based on the carbon emissions generated during production.
- It seeks to prevent carbon leakage and encourage cleaner industrial processes within and outside the EU.
- Impact on Indian Exports
- From 2026, Indian exporters of steel and aluminium may face 16–22% additional tax liability due to relatively higher carbon intensity.
- The EU accounts for around 22% of India’s total steel and aluminium exports.
- Other covered products include cement, fertilisers, electricity, and hydrogen, with scope for future expansion.
- Developmental and Trade Concerns
- CBAM is viewed by developing countries as a non-tariff trade barrier disguised as a climate measure.
- UNCTAD estimates that while CBAM may have minimal impact on global emissions, it could severely constrain exports from developing economies.
- Steel and aluminium are already highly protected sectors, magnifying the adverse impact.
- Expanding Global Trend
- The United Kingdom is also considering a similar carbon border tax, increasing the global relevance and spillover risks for Indian exporters.
Relevant Prelims Points:
- Carbon Border Adjustment Mechanism (CBAM) – objectives and coverage.
- Difference between carbon tax and emissions trading.
- Concept of carbon leakage.
- Role of UNCTAD in trade and development.
Relevant Mains Points:
- Significance:
- Highlights trade–climate policy tensions in global governance.
- Challenges India’s carbon-intensive manufacturing sectors.
- Concerns:
- Equity issues under the principle of Common but Differentiated Responsibilities (CBDR).
- Risk of eroding export competitiveness.
- Way Forward:
- Support exporters through technology upgradation and green finance.
- Negotiate CBAM-related safeguards under proposed India–EU FTA.
- Develop a domestic carbon market and standardised emissions accounting.
- Provide transitional incentives for low-carbon industrial processes.
UPSC Relevance:
GS 3 – Economy, Environment & Ecology | GS 2 – International Relations