Cement, iron, steel, aluminium, fertiliser, and hydrogen exports to the European Union (EU) will be subject to increased inspection beginning on October 1 of this year. From January 1, 2026, the EU will begin levying a carbon price on each shipment of these goods after 27 months.
Welcome to the “Carbon Border Adjustment Mechanism (CBAM)” regulation from the EU. New items will gradually be covered by CBAM. CBAM will be assessed by 2034 on all items exported to the EU. The tariff amount is concerning. CBAM may result in average tariffs on iron, steel, and aluminium items that range from 20 to 35 percent. This is far higher than the average 2.3% binding tariffs for manufacturers that the EU and the WTO agreed upon. High CBAM tariffs will make WTO and FTA obsolete. obligations without purpose. Let’s examine the rationale behind the EU’s implementation of CBAM and how India ought to get ready.
EU environmental objectives
By 2030, the EU hopes to reduce carbon emissions by 55% from 1990 levels. By 2050, it aspires to be carbon-neutral. The EU’s tool for achieving these objectives is the Emissions Trading System (EU ETS). About 10,000 power plants, oil refineries, iron, steel, and aluminium mills, cement, paper, glass, and paper mills, as well as civil aviation, are all monitored for pollutants.
Through the European Emission Allowance, the ETS system is operational (EUA). Call the authorization for one tonne of CO2 emissions a licence or permit. The amount of greenhouse gas emissions (mostly carbon dioxide) that each installation is allowed to emit is capped by the EU-ETS. Each participating company receives a specific quantity of EUAs per year.
They must purchase EUAs in the ETS auction if their emissions are greater than the EUA allotment. Companies with lower emissions have excess EUAs. The EU-ETS system gradually lowers the cap to lower emissions. By investments in more advanced technologies, fossil fuel substitutes, and energy efficiency, the companies are anticipated to reduce their emissions.
Hence, the EU-ETS is a cap-and-trade system that lowers emissions by relying on market forces. Investment choices are influenced by the carbon price that the system enables the market to establish. The most polluting industries, like steel and aluminium, are given free emissions allowances, or EUAs, to cover all of their emissions, even though the EU ETS covers many industrial sectors for emission reduction.
Any objective for reducing emissions taxes on these companies will force EU businesses to relocate to countries with lower costs, like China or India. Carbon leakage is the phrase used to describe the phenomena of businesses in the polluting sector moving from high-cost to low-cost nations. Carbon leakage is likely given that EU carbon prices would increase from €30 per tonne of CO2 in December 2020 to €100 in February 2023. The EU faced a challenge. To meet its climate targets, it must reduce emissions from its most polluting industries. Yet, if the EU implements emission reduction standards and allows free allowances, the majority of production may move to low-cost nations.
Applying CBAM only to imports from EU companies that have moved production to low-cost nations was one strategy to decrease carbon leakage. However the EU decided to impose a tariff on all imports via CBAM. at the current carbon costs in the EU. In order to avoid the relocation of industries or carbon leakage in these sectors, it was agreed to gradually phase out the free allowances from the most polluting sectors and establish CBAM at the same time. Global trade will be disrupted by CBAM levies on all goods by 2034. Canada, the US, the UK, and many other countries may soon adopt similar policies.
Due to the fact that they engage in the most carbon-intensive manufacturing, developing nations will suffer the most. Global value chains driven by rich nations have assured that cleaner production occurs in developed nations while the polluting portion of production occurs in poor nations. CBAM won’t have much of an effect on the climate. As consumption declines, the environment’s carbon footprint will decrease. CBAM does not intend to decrease consumption. According to EU estimates, global emissions in the CBAM sectors will fall by 0.4% by 2030.
The fundamental tenets of the Paris Agreement are broken by CBAM, poisoning the climate negotiations. 79% of all carbon emissions during the past few decades have been produced by developed nations. The decision has been made that they will be increasingly responsible for climate mitigation because of this. The Paris Agreement’s shared but differentiated responsibilities (CBDR) premise is in conflict with CBAM.
It forces industrialised nations’ environmental standards on underdeveloped nations. Also, the EU will now use the CBAM mechanism to collect money from developing nations rather than providing assistance. This money will be used by the EU as a financial resource rather than to aid underdeveloped nations in adopting climate change policies.
South Africa, Brazil, Russia, China, India, and The United Nations Framework Convention on Climate Change (UNFCCC) principle of Shared but Differentiated Responsibilities and Respective Capabilities, as well as the principles of Equality, were violated in April 2021 in a Joint Statement titled CBAM unfair.
Effects in India
For India’s metal industry, CBAM will provide a considerable challenge. The EU received 27% of India’s $8.2 billion in CY 2022 exports of iron ore pellets, iron, steel, and aluminium products. When CBAM covers all products, India’s exports to the EU would experience difficulty. 17% of India’s exports go to the EU, making it a significant trading partner. The following two measures regarding CBAM may be taken by the government: A task group should be established to prepare administrative ministries and industry. the CBAM challenge, to be met.
The second is the influence of CBAM in FTA talks with the UK and the EU. Even if the two nations decide to have zero tariffs under the FTA, CBAM will make sure that when EU goods enter India with zero tariffs, Indian goods will pay very high CBAM duties. The Climate Trojan Horse, CBAM, is being unleashed by the EU. Even if it doesn’t help the environment, it will undoubtedly cause significant disruptions in world trade.
