Carbon Border Adjustment Mechanism (CBAM)
- 11 May 2025
In News:
India has warned it will retaliate if the United Kingdom implements its proposed Carbon Border Adjustment Mechanism (CBAM) from January 1, 2027, calling it a violation of the Common But Differentiated Responsibilities (CBDR) principle of international climate agreements.
What is Carbon Border Adjustment Mechanism (CBAM)?
- It is a carbon tax on imports based on their carbon intensity of production.
- Aim: Prevent carbon leakage by aligning the cost of carbon between domestic and foreign producers.
- Sectors likely to be initially targeted include steel, cement, aluminium, and energy-intensive products.
- The UK is expected to implement its version of CBAM in 2027, following a similar approach by the European Union.
India’s Concerns
- Violation of CBDR Principle
- CBAM undermines the UNFCCC and Paris Agreement, which recognize that developing countries require flexibility and support for decarbonization.
- India’s per capita emissions are low, but its carbon intensity is higher due to developmental needs.
- Unfair Trade Practice
- CBAM could nullify tariff concessions negotiated under the India–UK Free Trade Agreement (FTA).
- Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal have labelled CBAM “unfair” and discriminatory.
- Double Taxation and Export Losses
- Indian exporters may face double taxation—domestic environmental levies and UK’s border tax.
- India proposed a ‘rebalancing mechanism’ and MSME carve-out, both of which the UK declined.
- Export-heavy sectors like textiles, leather, ceramics, engineering goods, and steel may be hit hard due to sustainability compliance burdens.
- MSME Vulnerability
- Labour-intensive MSMEs lack the capacity to meet expensive ESG norms and carbon tracking requirements.
- India's request for exemption or compensation for MSMEs was not accepted.
India’s Response Strategy
- India reserves the right to retaliate if CBAM is imposed.
- Potential responses include:
- Domestic carbon taxation to offset UK’s CBAM and use revenue for green transition.
- Invoking a rebalancing clause under the FTA’s “general exceptions” (similar to GATT), allowing trade countermeasures for environmental or public interest.
Strategic Implications for India
- Non-tariff barriers like CBAM can undermine market access gained through FTAs.
- India must stay alert to evolving trade conditions involving environment, labour, IPR, and gender standards, which often require policy adjustments.
- Calls for India to strengthen its carbon tracking, ESG frameworks, and climate-compliant production systems to remain globally competitive.