The European Union (EU) plans to introduce a Carbon Border Adjustment Mechanism (CBAM) tax from January 1, 2026. This move is raising concerns among experts about potential increased costs for Indian exports. Since October 2023, Indian exporters have been required to regularly submit documentation (approximately every two months) on their processes.

The EU is set to employ verifiers to inspect submissions from Indian exporters. Initially, this scrutiny will focus on specific sectors, but it''s expected that the verification process will gradually expand to include all imports into the EU. This development could have significant implications for trade and environmental policy. The Carbon Border Adjustment Mechanism (CBAM) is part of the EU''s "Fit for 55 in 2030" package, aiming to reduce greenhouse gas emissions by 55% by 2030 from 1990 levels. CBAM imposes a price on carbon emissions linked to the production of specific imported goods, ensuring fair carbon pricing.

CBAM''s Environmental Goals:

• Reducing Carbon Leakage: Aims to curb carbon leakage by discouraging relocation of carbon-intensive industries to areas with weaker environmental regulations.
• Global Climate Policy Compliance: Encourages worldwide adherence to stringent climate policies and reduces the environmental impact of production outside EU borders.

CBAM and the European Green Deal:

• Part of European Green Deal: The CBAM, integral to the European Green Deal, aims to prevent carbon leakage and maintain competitiveness through import duties on carbon-intensive goods from non-EU countries.

Target Sectors and Coverage:

• Focused Industries: Targets imports like cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen.
• Carbon Pricing for Specific Goods: Goods from countries with less stringent climate policies than the EU will face carbon pricing measures.
• Carbon Certificate Requirement: Importers must buy carbon certificates matching the embedded carbon emissions in their products.

Market Mechanism and Carbon Certificates:

• Alignment with EU ETS: Carbon certificates'' pricing under CBAM will be in line with the EU Emissions Trading System (ETS) rates.
• EU Industrial Emission Regulation: The market-based system manages industrial emissions within the EU.
• Incentive for Cleaner Production: Importers must acquire certificates at prices reflecting the carbon cost, promoting cleaner global production practices.

Challenges

• Opposition from BASIC Countries: Brazil, South Africa, India, and China (BASIC countries) collectively oppose the EU’s CBAM, labeling it "discriminatory" and inconsistent with the ''Common but Differentiated Responsibilities and Respective Capabilities'' (CBDR-RC) principle.
• Lack of Global Consensus: The EU''s push for a uniform global environmental standard is criticized, especially in light of the global consensus outlined in Article 12 of the Rio Declaration, which argues against imposing developed countries'' standards on developing nations.
• Greenhouse Gas Inventory Issues: Adjusting greenhouse gas content of imports in the inventories of importing countries challenges traditional greenhouse gas accounting methods.
• Perceived as Protectionism: The EU''s carbon border tax is seen by some as a form of protectionism, potentially leading to ''green protectionism,'' where local industries are unfairly protected from foreign competition under environmental pretexts. 

Implications for India

• Impact on India-EU Trade Relations: India, significantly impacted by CBAM, exports 27% of its iron, steel, and aluminium products to the EU. The tax could reduce the competitiveness of Indian products, leading to a potential decrease in demand.

• Effects on Manufacturing: India''s Commerce and Industry Ministry has criticized CBAM as harmful to the manufacturing sector, potentially acting as a significant deterrent.
• India''s Carbon Credit Trading System (CCTS): Introduced in 2022, CCTS aims to incentivize emission reductions and foster clean energy investments. It''s complemented by the Green Credit Programme Rules.
• Limited Options for India: India''s strategies include challenging CBAM as violating the Paris Agreement''s principles or negotiating with the EU for reinvestment of collected funds into green technologies.
• Need for India''s Carbon Taxation Measures: With the UK planning its own CBAM by 2027, India faces a pressing need to develop carbon taxation measures aligned with the Paris Agreement.
• Contradiction with FTA Norms: CBAM is criticized as a non-tariff barrier conflicting with Free Trade Agreements (FTAs), where India faces levies while allowing duty-free entry for ''green'' products from EU countries.

Strategies for India to Counter CBAM

• Vocal Opposition in International Forums: India should actively oppose CBAM on international platforms, arguing that it contravenes the principle of ''common but differentiated responsibility'' and impedes the developing world’s industrialization in line with international climate agreement equity.
• Consideration of Export Tax: India could consider imposing a similar tax on exports to the EU. This would generate funds for investment in eco-friendly production processes, potentially offsetting the impact of current taxes and preparing for future tax reductions. However, the acceptability of such a tax by the EU and its domestic and international legal feasibility remain uncertain.
• Market Diversification Strategy: To mitigate CBAM''s impact, India should reduce its reliance on the EU market by exploring new markets in Asia, Africa, and Latin America. Diversifying markets can protect India from the vulnerabilities of CBAM and other economic shifts.
• Seizing Green Opportunities: India can use the challenge of CBAM as a catalyst to green its production processes, aligning with global environmental goals and staying competitive in a carbon-conscious world. This aligns with India''s 2070 Net Zero Targets and contributes to long-term economic and environmental sustainability.

The EU''s CBAM, aimed at reducing greenhouse gas emissions and preventing carbon leakage, has led India to explore its own carbon trading mechanism, the CCTS. With CBAM''s transitional phase ending in December 2025, India needs to swiftly develop and implement carbon taxation measures in line with the Paris Agreement. The outcome of ongoing negotiations with the EU and challenges before the World Trade Organization will be pivotal in shaping India''s response to this evolving global environmental policy scenario.