TheAcademy . 11/10/2024 5:50 PM
Why is the European Union's Carbon Border Adjustment Mechanism (CBAM) in the news?
CBAM has been a hot topic recently as India's Finance Minister, Nirmala Sitharaman, expressed concerns about the unilateral nature of the EU’s climate-related trade policies. She highlighted these concerns during her speech at the Financial Times Energy Transition Summit, terming CBAM a trade barrier that could harm countries like India.
Sitharaman criticized CBAM for potentially stifling economic growth and hindering India’s green energy transition. She also indicated that CBAM could pose new challenges for India’s net-zero climate commitments and cause trade disruptions.
The Carbon Border Adjustment Mechanism (CBAM) is a key policy initiative of the European Union aimed at curbing carbon emissions. It works by placing a carbon price on imports from countries with less stringent climate regulations than the EU. The mechanism ensures that imported products face the same carbon costs as goods produced within the EU.
The primary objective of CBAM is to prevent carbon leakage. This phenomenon occurs when companies shift production to countries with weaker climate policies to avoid strict EU climate regulations. By imposing a carbon price on imports, CBAM helps promote fair competition and encourages global decarbonization.
Additionally, CBAM aligns with the EU’s broader climate goals, particularly the European Green Deal, which aims for net-zero emissions by 2050.
Initially, CBAM targets industries with high carbon emissions. These include:
The carbon price is calculated based on the embedded carbon emissions in these imported products.
CBAM will be implemented in phases:
2023-2025: During this transition phase, importers will only need to report the carbon emissions of their goods but will not be required to pay any carbon adjustments.
2026 onwards: Full implementation begins, and importers must purchase CBAM certificates corresponding to the carbon emissions embedded in their imports.
CBAM operates using a system of certificates. Importers must buy CBAM certificates to cover the carbon emissions of their imported goods. These certificates are priced to match the EU’s Emissions Trading System (ETS), ensuring a level playing field between domestic and foreign producers.
Moreover, if a country has its own carbon pricing mechanism, the cost paid for carbon emissions can be deducted from CBAM obligations, preventing double taxation.
India views CBAM as a unilateral and arbitrary trade barrier. According to Finance Minister Nirmala Sitharaman, CBAM poses several risks for India:
It could create trade disruptions, particularly for industries exporting goods to the EU.
CBAM may slow down India’s economic growth and affect its efforts to meet green energy transition goals.
India's concern is that developed countries, through mechanisms like CBAM, are introducing trade policies that disproportionately affect developing nations working towards their net-zero climate commitments.
Sitharaman has expressed confidence that the concerns regarding CBAM will not derail the ongoing Free Trade Agreement (FTA) negotiations with the EU. However, she emphasized that India will continue to voice its objections about the EU’s climate-related trade measures during the FTA discussions.
The EU Deforestation Regulations (EUDR) aim to prevent the import of commodities linked to deforestation, including products like soy, palm oil, coffee, cocoa, and wood. The rules require exporters to provide geolocation data proving that these commodities are not sourced from recently deforested areas.
Developing countries, including India, view these regulations as discriminatory because they impose additional compliance burdens and could act as non-tariff barriers to trade.
The EU’s deforestation regulations have been criticized by developing countries for several reasons:
Increased Compliance Costs: Exporters must provide detailed geolocation data to demonstrate that their products are not linked to deforestation, adding significant costs and administrative burdens. Small-scale farmers often lack the technology and resources to meet these requirements, making their exports less competitive in the EU market.
Trade Barriers for Agricultural Exports: Many developing countries rely on agricultural commodities, such as palm oil, coffee, and cocoa, which are identified as high-risk by the EU for deforestation. The regulations could reduce market access for these products, hurting the economies of countries dependent on agriculture exports.
Limited Recognition of National Efforts: Countries like India, Brazil, and Indonesia argue that the EU does not adequately acknowledge their national efforts to combat deforestation through reforestation projects and sustainable land-use policies. The one-size-fits-all nature of the EU rules undermines these nations’ sovereignty over their natural resources.
Unequal Responsibility for Climate Change: Developing nations point out that historically, developed nations have contributed more to global deforestation and carbon emissions due to industrialization. By enforcing stringent deforestation regulations on agricultural economies, developed countries are seen as shifting the responsibility for addressing global environmental problems onto developing nations.
Finance Minister Nirmala Sitharaman criticized the EU’s deforestation rules alongside CBAM, stressing that such measures could negatively impact India’s economic growth and sustainability efforts. Sitharaman reaffirmed that India will continue to raise its concerns with the EU, voicing dissatisfaction with what it perceives as unilateral trade barriers.
If fully implemented without addressing the concerns of developing nations, CBAM and EUDR could:
Increase costs for Indian exporters, making their products less competitive in the EU market.
Act as non-tariff barriers to trade, particularly for carbon-intensive industries and agricultural exports.
Hinder economic growth by slowing down India’s transition to green energy, as additional trade costs may divert resources away from crucial domestic investments.
The EU’s CBAM and Deforestation Rules represent significant global efforts to combat climate change, but they raise important questions about fairness and equity for developing nations like India. The unilateral nature of these regulations, coupled with the potential economic burden they place on developing countries, makes them a source of tension in global trade relations. While India remains committed to climate action and sustainable development, it continues to push back against policies that may unfairly affect its economy and sovereignty over its natural resources.
