CARBON BORDER ADJUSTMENT MECHANISM

  • India and the UK signed a Free Trade Agreement (FTA) on May 6, 2025, after nearly three years of negotiations.
  • A major hurdle in finalising the FTA was the UK’s proposed Carbon Border Adjustment Mechanism (CBAM) — a type of carbon tax on imports, set to apply from January 1, 2027.
  • India opposed CBAM and proposed a “rebalancing mechanism” to mitigate its economic impact on Indian industries.

What is Carbon Tax?

  • A tax on burning carbon-based fuels like coal, oil, and gas.
  • Based on the carbon content of the fuel.
  • Aimed at discouraging fossil fuel use and reducing CO₂ emissions.
  • Makes users pay for climate damage caused by carbon emissions.
  • Considered a form of pollution tax.
  • Usually levied upstream (at the extraction or import stage).
  • Helps achieve climate policy goals while generating public revenue.

Characteristics of Carbon Tax

  • Price on Carbon: Directly sets a cost per ton of carbon emitted.
  • Revenue Source: Funds can be used for green energy, environmental programs, or public redistribution.
  • Predictable Costing: Offers a transparent, fixed cost structure for emissions, aiding business planning.
  • Market Efficiency: Encourages innovation and investment in low-carbon technologies.

What is CBAM (Carbon Border Adjustment Mechanism)?

  • A carbon pricing tool designed to tax imports based on carbon emissions from their production.
  • Applies to sectors like aluminium, cement, fertilisers, hydrogen, iron, and steel.
  • First introduced by the EU in 2021; the UK now proposes its own version.
  • Objective: Prevent carbon leakage and ensure high environmental standards in domestic industries.

India’s Concerns with CBAM

  • Developing countries, including India, argue that CBAM:
    • Is discriminatory and violates climate equity.
    • Ignores the “Common But Differentiated Responsibilities” (CBDR) under the UNFCCC.
  • Indian ministers have labelled CBAM as “unfair” and not aligned with the Paris Agreement’s equity principles.

Impact on India

  • CBAM could impact India’s export competitiveness:
    • Over 15% of India’s exports go to the EU.
    • In 2022–23, India exported $75 billion worth of goods to the EU.

India’s Domestic Response: Carbon Credit Trading Scheme (CCTS)

  • CCTS launched in 2023 to develop a market-based mechanism for carbon reduction.
  • Unlike EU/UK CBAM, India’s CCTS accounts for developmental needs and emission intensities.
  • Key Features of CCTS:
    • Two-tier mechanism:
      • Compliance Mechanism – Obligated entities reduce GHG emission intensity to earn credits.
      • Offset Mechanism – Voluntary projects can generate credits via emission reduction/removal.
    • Not yet operational – Ministry notified Draft GEI Target Rules, 2025 to set emission norms and launch compliance.

The India–UK FTA signifies economic cooperation, but CBAM remains a point of friction. India’s balanced approach — trade negotiations, WTO protection, and domestic carbon market — reflects its evolving strategy on climate and trade policy.

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