The European Union has announced that its Carbon Border Adjustment Mechanism (CBAM) will be introduced on imports of products made from the processes which are not Environmentally sustainable or non-Green.
 

The primary purpose of the Carbon Border Adjustment Mechanism (CBAM) is to address the risk of Carbon leakage and to promote the global reduction of greenhouse gas emissions in the context of climate change mitigation efforts. 
 

Carbon leakage refers to the phenomenon where businesses relocate their production to regions or countries with less stringent climate policies to avoid the associated costs of reducing emissions.
 

CBAM aims to create a level playing field by imposing a carbon price on certain imports based on the carbon content of the products. The mechanism is intended to ensure that imported goods are subject to a carbon cost similar to that faced by domestic producers. 
 

CBAM will translate into a 20-35 % tax on select imports into the EU starting 1st January 2026. CBAM is part of the “Fit for 55 in 2030 package", which is the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels in line with the European Climate Law.
 

Key features of a Carbon Border Adjustment Mechanism (CBAM):
 

• Carbon Pricing on Imports: CBAM typically involves imposing a carbon price on imported goods based on their carbon footprint. 
• Coverage of Specific Sectors: CBAM may initially target specific high-emission sectors, such as steel, cement, and chemicals, where the risk of carbon leakage is particularly high.
• Phased Implementation: CBAM may be introduced gradually, starting with a few sectors and expanding over time. This phased approach allows businesses to adapt to the new requirements.
• Compliance Flexibility: CBAM may allow for flexibility in compliance, such as the use of benchmarks or product-specific emission factors, to determine the carbon content of imports.

Why did European Union introduce CBAM? 
 

• Preventing Carbon Leakage: CBAM reduces the risk of businesses relocating to regions with lower environmental standards to avoid emissions reduction costs.
• Leveling the Playing Field: Ensures fair competition by making imported goods face a similar carbon cost as domestically produced goods.
• Global Emission Reductions: Incentivizes businesses worldwide to adopt cleaner technologies and practices, contributing to global greenhouse gas reduction. It can encourage non-EU countries to adopt more stringent environmental regulations, which would reduce global carbon emissions.
• Encouraging International Cooperation: Signals a shared responsibility for addressing climate change and encourages countries to take measures to reduce emissions.
• Revenue Generation: Generates revenue for the implementing jurisdiction, which can be used to support climate-related initiatives.
• Promoting Innovation: Stimulates innovation in cleaner technologies as businesses invest in research and development to reduce carbon intensity.
• Enhancing Public Support: Addresses concerns about job losses and economic competitiveness, garnering public support for climate policies.

Impacts on India
 

CBAM will have an adverse impact on India's exports of metals such as Iron, Steel and aluminum products to the EU, because these will face extra scrutiny under the mechanism. India's major exports to the EU, such as iron ore and steel, face a significant threat due to the carbon levies ranging from 19.8% to 52.7%.
 

From 1st January 2026, the EU will start collecting the carbon tax on each consignment of steel, aluminum, cement, fertilizer, hydrogen and electricity. Hence CBAM poses a risk to India’s Export competitiveness.

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