The European Union (EU) has announced the introduction of the Carbon Border Adjustment Mechanism (CBAM) from October 1st, 2023. This mechanism aims to put a fair price on carbon emitted during the production of carbon-intensive goods entering the EU and to encourage cleaner industrial production in non-EU countries. This essay explores the implications of CBAM on India, particularly on its metal exports to EU countries.

Carbon Border Adjustment Mechanism (CBAM)

CBAM is a mechanism to put a fair price on carbon emitted during the production of carbon-intensive goods that are entering the EU. It is aimed at encouraging cleaner industrial production in non-EU countries. The EU plans to introduce CBAM gradually from October 1st, 2023. It will translate into a 20-35% tax on selected imports to the EU nations by 1st January 2026. By 2034, CBAM will cover all products entering the EU.

Impact of CBAM on India
  • The Carbon Border Adjustment Mechanism (CBAM) will significantly impact the global trade of developing countries, especially India.
  • In 2022, 27% of India’s total export in iron, steel, and aluminium products (valuing USD 8.2 billion) went to the EU.
  • Under CBAM, India’s export of iron and aluminium to EU nations will attract extra scrutiny.
  • The tariffs for these products will be raised to 20-35%, exceeding the EU’s agreed-upon bound tariff rate of 2.2% for its manufacturers at the World Trade Organization (WTO).
  • This will increase costs resulting in the loss of billions of dollars of exports for India.
  • Fertilizers, cement, and electrical energy are also affected products under CBAM, but India’s export on these products to the EU is very negligible, hence won’t impact India that much.
Way Forward

Given the impact of CBAM on India’s metal exports, it is crucial to prepare the industry to meet the challenges of CBAM. A task force should be set up to educate the ministries and industry players involved in the steel and aluminum sector to meet the deadline of 1st October.

The industry should explore ways to reduce carbon emissions during production to reduce the impact of CBAM. It is also imperative to set up a carbon market in India to encourage cleaner industrial production and to prepare for future carbon pricing mechanisms.

MCQs on Carbon Border Adjustment Mechanism and its Implications for India
  1. Which products will be impacted by CBAM in India?
    A. Iron, Steel, and Aluminium
    B. Fertilizers, Cement, and Electrical Energy
    C. Both A and B
    D. None of the above
    Correct Answer: A. Iron, Steel, and Aluminium
    Explanation: India’s export of iron and aluminium to EU nations will attract extra scrutiny and the tariffs for these products will be raised to 20-35%, which will impact India’s export of these products to the EU.
  2. What percentage of India’s total export in iron, steel, and aluminium products went to the EU in 2022?
    A. 27%
    B. 37%
    C. 47%
    D. 57%
    Correct Answer: A. 27%
    Explanation: 27% of India’s total export in iron, steel, and aluminium products (valuing USD 8.2 billion) went to the EU in 2022. This will be impacted by the implementation of CBAM by the EU.
  3. What is the way forward for India to mitigate the impact of CBAM?
    A. Setting up a task force to prepare the ministries and the industry to meet the challenges of CBAM
    B. Educating all the industry players involved in the steel and aluminium sector to meet the deadline of 1st October
    C. Setting up a carbon market in India
    D. All of the above
    Correct Answer: D. All of the above
    Explanation: To mitigate the impact of CBAM, India needs to set up a task force to prepare the ministries and the industry to meet the challenges of CBAM, educate all the industry players involved in the steel and aluminium sector to meet the deadline of 1st October and set up a carbon market in India.
  4. How will CBAM impact India’s export to EU countries?
    A. It will not have any impact on India’s exports.
    B. It will affect all of India’s exports to EU countries.
    C. It will only affect India’s exports of iron, steel, and aluminum to EU countries.
    D. It will only affect India’s exports of fertilizer, cement, and electrical energy to EU countries.
    Correct Answer: C. It will only affect India’s exports of iron, steel, and aluminum to EU countries.
    Explanation: CBAM will impact India’s exports of iron, steel, and aluminum to EU countries by increasing the tariffs to 20-35%, exceeding the EU’s agreed-upon bound tariff rate of 2.2% for its manufacturers at the World Trade Organization (WTO). This will result in the loss of billions of dollars of exports. Although fertilizers, cement, and electrical energy are the other affected products, India’s exports on these products to the EU are very negligible and hence won’t impact India that much.

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