Carbon Border Adjustment Mechanism

Syllabus: GS3/Environment, Conservation

Context:

• India aims to protect domestic industry from EU’s Carbon Border Adjustment Mechanism (CBAM).

About:

• The government aims to take all necessary steps, including by setting up auto component parks using a combination of green energies, to protect Indian industry from any adverse impact of the European Union’s CBAM.

Carbon Border Adjustment Mechanism (CBAM):

• It is a tool to put a fair price on the carbon emitted during the production of carbon intensive goods and at most significant risk of carbon leakage like cement, iron and steel, aluminium, fertilisers, electricity and hydrogen that are entering the EU.
  
  
  1. It will enter into force in its transitional phase as of 1 October 2023.
• The idea here is to avert the possibility of carbon leakage alongside encouraging producers in non-EU countries to green their manufacturing processes.
• The gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry.
  
  Why are other countries worried?
  
• According to the United Nations Conference on Trade and Development (UNCTAD):
  • Russia, China and Turkey were most exposed to the CBAM.
  • India, Brazil and South Africa would be most affected among the developing countries.
    • India exported steel and aluminium, contributing nearly 14% of its export mix for all products.
  • Mozambique would be the most exposed least-developing country.
    
• Impact on India:
  
  1. The EU is India’s third largest trade partner and the size of exports from India will invariably rise.
  2. Scope of CBAM would expand beyond its current ambit to include other sectors as well.
• India’s products have a higher carbon intensity than its European counterparts, the carbon tariffs imposed will be proportionally higher making Indian exports substantially uncompetitive.
  1. International climate policies (including CBAM) will compel other countries to impose similar regulation eventually translating to ‘a significant impact’ on India’s trading relationships and balance of payments.
  
  Way Forward:
• The high carbon emitting activities like manufacturing have been outsourced and low carbon emitting activities like branding and financing have been retained, affecting the global value and supply chains.
• Carbon emissions in traded goods and services comprise only 27% of global carbon emissions which indicates that the scope of international trade policy in achieving global green growth is limited.
• So, it is the domestic or the national policies which are going to be more effective than international rules.
  
  Source: TH