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.