Description

The European Union (EU) has recently recognized India’s concerns regarding the implementation of the Carbon Border Adjustment Mechanism (CBAM). Here's a closer look at the CBAM:

About CBAM

The CBAM is a tariff mechanism that the EU has introduced to address carbon emissions in products imported into the region. It aims to tackle carbon leakage, which occurs when manufacturing shifts to countries with less stringent or no carbon pricing policies.

Purpose Of CBAM

The primary purpose of CBAM is to ensure that products entering the EU bear a price reflective of their carbon emissions during production. This mechanism intends to promote cleaner industrial practices in non-EU countries by aligning the carbon pricing of imports with domestic EU production. The aim is to ensure that the EU’s climate goals are not undermined by products made in regions with lower environmental standards.

Mechanism Works

The CBAM requires EU importers to buy carbon certificates that correspond to the carbon price that would have been paid if the goods were produced within the EU. These certificates are priced based on the EU carbon credit market auction. Importers must report the carbon emissions embedded in their imported goods and surrender the required certificates annually. If importers can prove that a carbon price was already paid during production, they can deduct the equivalent amount.

Compatibility With WTO Rules

The CBAM is structured to align with World Trade Organization (WTO) regulations, ensuring it does not conflict with international trade rules.

Carbon Certificates

The carbon certificates represent the embedded carbon emissions in goods entering the EU. The number of certificates required will depend on the quantity of goods imported and their carbon emissions. EU importers must declare the emissions for each product and submit the corresponding certificates. Goods from countries with a carbon pricing system equivalent to the EU’s will be exempt from purchasing these certificates.

Implementation Timeline

The CBAM is set to fully implement in 2026, following a transitional phase that runs from 2023 to 2025. During the transitional period, only reporting requirements are in place, with the financial obligations beginning in 2026.

Coverage

Initially, the CBAM will apply to certain high-carbon industries at risk of carbon leakage, including sectors such as iron and steel, cement, fertilizers, aluminum, electricity, and hydrogen.

This move is part of the EU’s broader strategy to combat climate change while maintaining fair competition in global markets.

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