Relevance for UPSC: GS III (Economy, Environment, International Trade); Source: The Hindu, European Commission

Context

From January 2026, Indian exports of steel and aluminium to the European Union will face additional charges under the Carbon Border Adjustment Mechanism (CBAM). This comes at a time when India–EU Free Trade Agreement negotiations are underway, making CBAM both an environmental and a trade concern.

What is CBAM? (Concept Explained)

• CBAM is a trade-linked climate policy.
• It extends the European Union’s EU Emissions Trading System to imports.
• Importers must pay a carbon price equivalent to what European producers pay.
• The charge is based on actual, plant-level emissions, not national averages.
• Objective: Prevent carbon leakage, where production shifts to countries with weaker climate rules.

Why CBAM Affects India Strongly

• Carbon pricing gap: India does not have an economy-wide carbon tax, so exporters bear the full CBAM cost.
• High-emission production routes: Coal-based steel has significantly higher carbon intensity than European steel.
• Data and compliance burden: Exporters must provide verified emissions data; smaller firms risk penalties if data is unavailable.
• Export impact: Higher costs reduce price competitiveness of Indian steel and aluminium in EU markets.

Conclusion

CBAM reflects a structural shift in global trade, where carbon intensity becomes a determinant of market access. For India, the challenge lies in combining cleaner industrial production, robust carbon accounting systems, and strategic trade negotiations to protect exports while aligning with global climate goals.

Q. The primary objective of the Carbon Border Adjustment Mechanism is to:
A. Promote free trade
B. Prevent carbon leakage by equalising carbon costs
C. Replace emissions trading systems
D. Impose uniform climate taxes globally

Correct Answer: B