SYLLABUS

GS-2: Effect of Policies and Politics of Developed and Developing Countries on India’s interests, Indian Diaspora.

GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Context: The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) came in to effect on January 1, 2026, that imposes a carbon levy on imports of carbon-intensive products.

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• The CBAM will initially apply to iron and steel, aluminium, fertilizers, cement, electricity and hydrogen.
• From January 1, 2026, independent verification of emissions data becomes mandatory. Only EU-recognised or ISO 14065- compliant verifiers will be accepted.

What is CBAM?

• It is the EU’s mechanism to price carbon emitted during the production of carbon-intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. 

• Objective: To align with Europe's push to cut greenhouse gas emissions by 55% by 2030.

• Phases of CBAM: Transitional phase was implemented from 1 October 2023 to 2025.

• The definitive period began on 1 January 2026.

• Mechanism: EU importers must register with national authorities, report the carbon in their imports, and buy certificates linked to EU ETS prices.

• EU’s Emissions Trading System (ETS) is a regulated carbon market in which the Union sets an annual cap on greenhouse gas emissions, and the companies operating within the EU must purchase allowances for their emissions.

Impact of CBAM on India 

• Increased Export Cost: CBAM is expected to raise costs for exporters of products such as steel, iron, aluminium, cement and fertilisers, potentially reducing their trade competitiveness.

• As per The Global Trade Research Initiative (GTRI) reports, many Indian exporters may have to cut prices by 15-22 % so EU importers can use that margin to pay the CBAM tax.

• High Compliance Burden: CBAM’s complex data and verification rules may raise compliance costs and drive smaller exporters out of the EU market.

• Manufacturing exporters have to track fuel use, electricity consumption, production volumes, and emission factors on a quarterly basis aligned with EU methodologies.

• Declining Export: The reporting phase of CBAM led to a 24.4 % drop in steel and aluminium exports from India to the EU.

• Non-tariff trade barrier: Restricts trade not through customs duties, but via regulatory, cost, and compliance requirements.

• Sector specific Impact: Steel and aluminium exporters will be most affected as in these sectors power generated from coal significantly raises the carbon burden and, therefore, the CBAM cost.

Concerns from Developing countries: 

• Uniform emissions standards to both developed and developing economies impose disproportionate burdens and risk deepening existing trade inequalities as highlighted during UNFCCC COP30 in Brazil.

• Unilateral climate-linked trade measures also undermine multilateral trade principles and conflict with the concept of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC).

• Shift of Decarbonisation costs: CBAM risks shifting the cost of decarbonisation onto poorer countries, also it does not address historical responsibilities or structural inequalities.

Sources: 
Climate
Taxation
Economic Times
New Indian Express
Financial Express