Context
India has flagged concerns relating to sensitive and confidential trade data of its exporters getting compromised while complying with the European Union’s Carbon Border Adjustment Mechanism (CBAM).
About
- Indian manufacturing exports in sectors such as steel, oil refining and cement align extremely favourably with global cost competitiveness benchmarks and the concerns flagged by Indian exporters pertain to sensitive trade secrets in these segments getting compromised.
Carbon Border Adjustment Mechanism (CBAM)
The EU’s Carbon Border Adjustment Mechanism (CBAM) is a landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.
- While the CBAM is set to come into effect from 2026, the transition period requiring exporters to submit data to EU authorities began October 1, 2023, with the first reporting period for importers ending 31 January 2024.
- The objective of the transitional period is to serve as a pilot and learning period for all stakeholders (importers, producers and authorities) and to collect useful information on embedded emissions to refine the methodology for the definitive period.
- With this enlarged scope, CBAM will eventually – when fully phased in – capture more than 50% of the emissions in ETS covered sectors.
How it Works?
By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU.
- The formulae devised to calculate this content will be based on the EU-ETS mechanism, barring for the first year.
- The price of the certificates would be calculated according to the auction prices in the EU carbon credit market.
- The CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production
- The CBAM requires EU importers to submit nearly 1,000 data points and methods used in production by exporters.
Apply on Products:
- The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.
CBAM Work like EU’s Emission Trading System (ETS)
- The CBAM is intended to work like the EU’s Emission Trading System (ETS), which sets a cap on the amount of GHG emissions permitted.
- Under the EU-ETS, companies covered by the scheme have to ‘buy’ allowances corresponding to their GHG emissions.
- Financial incentives are provided to them to cut emissions.
- But energy-intensive industries receive free allowances to ensure their competitiveness.
- This is also a way of preventing carbon leakage, wherein carbon-intensive production by EU-based producers could move to non-EU countries with lax environmental regulations.
- The CBAM has been pitched to replace this allocation of EU-ETS allowances.
Concerns:
According to the United Nations Conference on Trade and Development (UNCTAD):
- Russia, China and Turkey were most exposed to the CBAM.
- India, Brazil and South Africa would be most affected among the developing countries.
- India exported steel and aluminium, contributing nearly 14% of its export mix for all products.
- Mozambique would be the most exposed least-developing country.
- The recent crisis in the Red Sea area is also feared to have a bearing on exports of textile and agri. products to the EU.
- Trade experts have warned that data collection by the EU under the CBAM must be looked into by the government as Brussels largely aims to revive manufacturing in its territory and wipe out the trade deficit with developing countries such as India and China.
- The government has already questioned the CBAM in the WTO and is simultaneously looking for concessions.
Impact on India
- This assumes significance as India exports over 15 percent of its total goods exports to the EU. In 2022-23, India exported goods worth $75 billion to the EU.
- The move also comes at a time when India’s exports to the EU are slowing this year due to weakening demand in the west.
- India is reportedly among the top eight countries that will be adversely affected by the CBAM.
- As per the Global Trade Research Initiative report, in 2022, 27% of India’s exports of iron, steel, and aluminum products worth $8.2 billion went to the EU.
- It is estimated that a few of its core sectors such as steel will be greatly affected by the CBAM.
- India seems to have limited options to navigate the CBAM framework.
India’s Progress on its Carbon Trading Mechanism
India has just started working on its own carbon trading mechanism. In December 2022, it amended the Energy Conservation Act, 2001, to introduce the Carbon Credit Trading System (CCTS).
- This is proposed to combat climate change by incentivising actions for emission reductions leading to increased investments in clean energy by the private sector.
- The Ministry of Power is still working on the specifics to operationalise the CCTS, including carbon valuation.
In India, the obligatory CCTS model is also coupled with the voluntary market-based mechanism called the Green Credit Programme Rules, notified by the Ministry of Environment in 2023.
- The scheme is aimed to encourage more environmentally proactive actions going beyond the carbon reduction mandate.