Carbon border adjustment mechanism

International trade has a carbon problem

(Source :The Hindu, 3rd June, 2023)

The article highlights that International trade has a carbon problem.


The EU’s carbon border adjustment mechanism (CBAM) aims to put a price on carbon imports, but developing countries are concerned about the impact.

What is the context?
  • The European Union (EU) has introduced a carbon border adjustment mechanism (CBAM). It aims to put a price on carbon imports. This is designed to prevent carbon leakage. It is when companies move their production to countries with lower environmental standards in order to avoid paying for carbon emissions.
  • The CBAM is part of the EU’s Green Deal, a set of ambitious policies aimed at making the EU climate neutral by 2050. The CBAM is expected to raise €10 billion per year, which will be used to support the Green Deal.
Carbon Border Adjustment Mechanism (CBAM):
  • The CBAM is a new EU policy that will put a price on carbon emissions from imported goods.
  • The CBAM will apply to a range of carbon-intensive goods, including cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen.
  • Gradually, starting in 2023, the EU will phase in the CBAM.
  • The CBAM aims to protect European businesses from carbon leakage, which refers to the risk of companies relocating production to countries with lower carbon prices.
  • The CBAM also aims to encourage other countries to adopt ambitious climate policies.

The CBAM is a significant step forward in the EU’s efforts to reduce greenhouse gas emissions. It is also a major test of the EU’s ability to cooperate with other countries on climate change.

Some additional details about the CBAM:

  • The implementation of the Carbon Border Adjustment Mechanism (CBAM) will involve applying a system of import duties.
  • The duty amount will correspond to the price of carbon emissions within the EU Emissions Trading System (ETS).
  • Importers have the opportunity to exempt themselves from paying the duty by providing evidence that the goods were produced in a country with an equivalent carbon pricing system to the EU Emissions Trading System (ETS).
  • The CBAM will be revenue-neutral. The EU will use revenue from the CBAM to support decarbonization.
What are the concerns?
  • India is concerned that the c (CBAM) will hurt its exports of carbon-intensive products, such as steel and aluminum. India argues that the CBAM is unfair and discriminatory, and that it will make it harder for India to meet its climate goals.
  • India is not the only country that is concerned about the CBAM. Other developing countries, such as China and Brazil, have also expressed concerns.
  • India has expressed concerns about the EU’s Carbon Border Adjustment Mechanism (CBAM), saying that it could act as a trade impediment and could breach WTO regulations. Nevertheless, India remains committed to reducing its carbon emissions with a goal to achieve net-zero emissions by 2070.
key concerns that India has raised about the CBAM:
  • The CBAM could act as a trade barrier, making it more difficult for Indian goods to enter the EU market.
  • The CBAM could be discriminatory, as it would only apply to imports from countries that do not have a carbon pricing system equivalent to the EU’s Emissions Trading System (ETS).
  • The CBAM could breach WTO rules, as it could be seen as a form of subsidies for European industries.

India has called on the EU to address these concerns before implementing the CBAM. The EU has said that it is willing to discuss these concerns with India, but it has so far refused to make any changes to the CBAM.

What are the solutions?

The EU has said that it is willing to work with India and other developing countries to address their concerns. The EU has proposed a number of solutions, including:

  • Exempting developing countries from the CBAM for a period of time.
  • Providing financial assistance to developing countries to help them reduce their emissions.
  • Working with developing countries to develop a global carbon pricing system.

Some possible solutions that could be considered are

  • The EU could delay the implementation of the CBAM, giving India more time to implement its own carbon pricing system.
  • The EU has the option to exempt certain goods from the CBAM, such as goods produced by small businesses or goods crucial for India’s development.
  • The EU could provide financial assistance to India to help it implement its own carbon pricing system.

It is important to find a solution that is fair to both India and the EU. The CBAM has the potential to be a major impediment to trade between the two countries. However, it could also be a major driver of innovation and a catalyst for change.

What is the conclusion?

The CBAM is a complex issue with no easy solutions. It is important for the EU and developing countries to work together to find a solution that is fair and effective.

The CBAM is a significant step forward in the fight against climate change. However, it is important to ensure that the CBAM does not have a negative impact on developing countries.

Way ahead

The EU and India are expected to continue negotiations on the CBAM in the coming months. It is important for both sides to be willing to compromise in order to reach a mutually beneficial agreement.

The CBAM is a new and untested policy. It is important to monitor the implementation of the CBAM to ensure that it is effective in reducing emissions and does not have a negative impact on developing countries.

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