The European Union's Carbon Border Adjustment Mechanism (CBAM) is a landmark regulation aimed at addressing carbon leakage and promoting climate action. It imposes a carbon price on imports of certain carbon-intensive goods entering the EU, ensuring that the cost of carbon emissions is reflected in the price of both domestic and imported products. While CBAM is a crucial step towards achieving the EU's climate goals, it has significant implications for India, a major exporter of CBAM-covered goods. This blog delves into the potential impacts of CBAM on India, examining the economic, environmental, and social dimensions of this new regulation.

CBAM Regulations Overview

CBAM, introduced on October 1, 2023, is designed to prevent carbon-intensive imports from undermining the EU's climate objectives and to encourage the adoption of cleaner production practices globally. The mechanism, aligned with the Paris Agreement, will be implemented in phases, with a gradual introduction from 2026 to 2034, aligned with the phase-out of free allowances under the EU Emissions Trading System (ETS). This acts as a driver for EU companies to decarbonise their production faster.

Initially, CBAM focuses on a limited range of goods considered susceptible to carbon leakage: cement, electricity, iron and steel, aluminum, fertilizer, and chemicals. Starting from January 1, 2026, importers will be required to purchase CBAM certificates to cover the embedded emissions in their imports, effectively imposing a carbon tax at the border. The price of these certificates will be linked to the price of EU allowances under the European Union Emissions Trading System (ETS).

CBAM's primary objective is to equalise the price of carbon between domestic products and imports in selected sectors, thereby reducing the risk of carbon leakage. Carbon leakage occurs when companies relocate their production to countries with less stringent climate regulations to avoid the costs associated with carbon emissions reduction in the EU. By imposing a carbon price on imports, CBAM aims to incentivise cleaner production practices in exporting countries and ensure fair competition for EU businesses.

The CBAM will pass through several phases:

• Transitional phase (October 1, 2023, to December 31, 2025): Importers report embedded emissions of covered goods.
• Definitive phase (From January 1, 2026): Importers declare annually the quantity of goods imported in the preceding year and their embedded GHGs, surrendering the corresponding number of CBAM certificates. The gradual introduction of CBAM will be aligned with the phase-out of free allowances under the EU ETS.

India's Carbon Emissions and Trade with the EU

India is the world's third-largest emitter of greenhouse gases (GHGs), with CO2 emissions reaching 2.8 Gt in 2023. Despite this, India has the lowest per capita emissions in the G20 at just 1.9 tCO₂ per person, less than half the world average. The country's emissions are primarily driven by a rising population, a rapidly growing economy, and increased fossil energy consumption. Coal power plays a significant role in India's emissions, accounting for 72% of total CO2 emissions from fuel combustion in 2022.

The EU is India's largest trading partner, accounting for €124 billion worth of trade in goods in 2023. India is the EU's ninth-largest trading partner, with bilateral trade in goods increasing by almost 90% in the last decade. Key sectors in India-EU trade include engineering goods, pharmaceuticals, gems and jewelry, manufactured goods, and chemicals. The EU is also a leading foreign investor in India, with investment stock reaching €108.3 billion in 2022.

Potential Impact of CBAM on India

1. Economic Impact

CBAM is expected to have a significant economic impact on India, particularly in its energy-intensive export sectors. A study by the Centre for Science and Environment (CSE) estimates that CBAM could cost India 0.05% of its GDP. This is primarily due to the potential increase in export costs for CBAM-covered goods, which could lead to reduced competitiveness in the EU market. The implementation of CBAM presents significant administrative and technical challenges for Indian producers.

The reporting obligation, effective from October 2023, mandates the disclosure of the quantity of imported goods, their embedded carbon emissions (both direct and indirect emissions), and any applicable carbon costs incurred in the exporting country. This requirement poses a significant challenge for Indian exporters, who, in the absence of proper technological means, must adhere to EU standards by monitoring, calculating, reporting, and verifying emissions.

The impact of CBAM will vary across different industries. The iron and steel sector, which accounts for a significant portion of India's exports to the EU, is expected to be the most affected. A report by ICRA suggests that profits from Indian steel exports to the EU may fall by US$65-160/MT between 2026 and 2036 due to CBAM compliance requirements. Other sectors like aluminum, cement, and fertilizers are also likely to experience increased costs and reduced demand in the EU market.

A. Impact on the Cement Industry:

CBAM poses a considerable challenge to India's cement industry, which relies heavily on exports. The EU's carbon tax on cement imports is expected to reduce profit margins for Indian cement producers by $65-160 per metric ton between 2026 and 2036. This could lead to job losses and plant closures in the industry, further impacting the Indian economy.

B. Impact on the Aluminium Industry:

The aluminium industry in India is also expected to be significantly affected by CBAM. With nearly 27% of India's aluminium exports going to the EU, the new carbon tax could lead to increased production costs and potential trade diversion. To mitigate this impact, Indian aluminium producers may need to invest in renewable energy and reduce their carbon emissions to remain competitive in the EU market.

2. Environmental Impact

While CBAM is primarily an economic measure, it could have positive environmental impacts on India. By incentivising cleaner production practices, CBAM could encourage Indian industries to reduce their carbon emissions and invest in green technologies. This could contribute to India's efforts to achieve its climate goals, including its commitment to become carbon neutral by 2070.

However, there are concerns that CBAM could lead to trade diversion, where Indian exports are redirected to countries with less stringent environmental regulations. This could potentially offset the environmental benefits of CBAM and shift emissions to other parts of the world.

3. Social Impact

The social impact of CBAM on India is complex and multifaceted. While the transition to cleaner production could create new jobs in green sectors, there is a risk of job losses in carbon-intensive industries that face reduced competitiveness. The potential impact on employment will depend on the ability of Indian industries to adapt to CBAM regulations and the government's policies to support a just transition.

CBAM could also have implications for consumer prices in India. Higher input costs for industries could translate into inflated prices for goods and services, affecting the overall economy and potentially disproportionately impacting vulnerable populations. It is important to note that the EU has internal measures to allocate funds towards social costs from the transition, such as the Just Transition Fund (JTF), which aims to support territories most negatively impacted by the transition towards climate neutrality. It supports re-skilling, job search assistance, the creation of new firms, and investment in MSMEs, among other initiatives.

India's Policies and Initiatives to Reduce Carbon Emissions

India has implemented various policies and initiatives to reduce carbon emissions and promote sustainable development. The government's recent direction asking the steel sector for time-bound action for its green transition offers the perfect opportunity for the industry to take greater initiative and be more articulate in conveying its actual interest in trade and its associated challenges. These include:

• National Action Plan for Climate Change (NAPCC): Provides an overarching framework for all climate actions, including missions in specific areas like solar energy, energy efficiency, and sustainable agriculture.
• State Action Plan for Climate Change (SAPCC): Outlines sector-specific and cross-sectoral priority actions, including adaptation measures, for each state/union territory.
• Energy Conservation Act (2022): Promotes energy efficiency and sustainable energy practices, including the establishment of a Carbon Credit Trading Scheme.
• Green Hydrogen Mission: Aims to promote the production and adoption of green hydrogen in various sectors, with a target of 5 million tonnes per annum by 2030.
• Electric Vehicles (EV) Policy: Targets 30% EV sales in private cars, 70% in commercial vehicles, and 80% in two and three-wheelers by 2030.
• Enhanced Energy Efficiency: India aims to increase energy efficiency in its multiple sectors, such as transportation, power and electricity, and industrial manufacturing. These energy efficiency steps will help reduce the overconsumption and waste of power and fuel in different sectors.

These policies and initiatives demonstrate India's commitment to climate action and its efforts to transition towards a low-carbon economy. India aims to increase its renewable energy quotient by installing 50 percent of its renewable sources harnessing equipment by 2023. The increase in renewable energy harnessing will reduce greenhouse gas emissions to a great extent.

India's Position on CBAM and Potential Responses

India has expressed concerns about CBAM, viewing it as a discriminatory measure that could negatively impact its exports and economic growth. The government has argued that CBAM is incompatible with the principles of equity and CBDRRC (Common but Differentiated Responsibilities and Respective Capabilities). Many government officials in India have considered the proposed CBAM as "discriminatory" and a "trade barrier" that would hit not only Indian exports but also those of many other developing nations. The World Trade Organization (WTO) has also raised concerns about the fairness of the EU's taxation policy when India is already adherent to the Paris climate agreement protocols of becoming carbon neutral by 2070.

The EU is engaging with India to ensure the effective and seamless implementation of CBAM. This includes technical meetings with the Ministry of Power, including the Bureau of Energy Efficiency (BEE).

India is exploring various potential responses to CBAM, including:

• WTO challenge: The government is considering filing a complaint with the WTO, arguing that CBAM is a trade barrier and seeking relief for its exporters.
• Domestic carbon pricing: Implementing a domestic carbon tax or emissions trading scheme to incentivise cleaner production and potentially offset CBAM charges.
• Retaliatory measures: Exploring the possibility of imposing counter-taxes on EU products.
• Diplomatic negotiations: Engaging with the EU to address concerns and seek a mutually beneficial solution. One aspect of this negotiation strategy involves advocating for the EU to share the revenues generated from CBAM with non-EU countries to support capacity building, technology transfer, and emission reduction initiatives in developing nations.
• Export diversification: Seeking alternative markets for its exports to reduce reliance on the EU. For example, Indian steelmakers are actively seeking alternative global markets across Africa, Latin America, and the Middle East to mitigate the potential impact of CBAM on their exports.

India's response to CBAM will likely involve a combination of these measures, aimed at mitigating the negative impacts and maximising potential opportunities.

Adapting to CBAM and Turning it to India's Advantage

While CBAM presents challenges, it also offers opportunities for India to accelerate its transition towards a low-carbon economy. By adapting to the new regulations, India can turn CBAM to its advantage and enhance its global competitiveness.

Some key strategies for adaptation include:

• Accelerating decarbonisation efforts: Investing in renewable energy, energy efficiency, and green technologies to reduce the carbon intensity of Indian industries.
• Developing a robust carbon accounting system: Establishing standardised guidelines and methodologies for measuring and reporting carbon emissions. At the heart of the green transition are exceedingly technical and foundational issues like the standardiation of methods to measure carbon emissions. Greater transparency and regulatory coherence in such standards can accelerate decarboniation and achieve environmental sustainability without creating unnecessary barriers to trade.
• Promoting transparency and sustainability reporting: Enhancing transparency in production processes and adopting international standards for sustainability reporting.
• Leveraging international cooperation: Collaborating with other countries and international organisations to address CBAM-related challenges and promote a global approach to climate action.
• Green Steel Taxonomy: India has recently announced a green steel taxonomy to align with global standards and enhance competitiveness. According to this taxonomy, steel produced in plants with a CO2 equivalent emission intensity of less than 2.2 tonnes of CO2 per tonne of finished steel (TFS) qualifies as green steel.
• Leveraging I-RECs: India can leverage International Renewable Energy Certificates (I-RECs) as a potential revenue source and a way to unlock finance for clean energy developers.

By proactively adapting to CBAM and embracing sustainable practices, India can mitigate the risks and leverage the opportunities presented by this new regulation.

Conclusion

CBAM is a significant development in global climate policy with far-reaching implications for India. While the regulation presents challenges for India's export-oriented industries, it also offers a catalyst for accelerating the country's transition towards a low-carbon economy. By adopting a proactive and strategic approach, India can mitigate the risks, leverage the opportunities, and turn CBAM to its advantage. This will require a concerted effort from the government, industry, and civil society to promote sustainable practices, invest in green technologies, and ensure a just transition for all.