Carbon Border Adjustment Mechanism: India’s Response

INTRODUCTION

The Carbon Border Adjustment Mechanism Regulation (“CBAM Regulation”) is one of the most important regulations of the European Green Deal (“EGD”).¹ The EGD is a series of policy initiatives taken up by the European Union (“EU”) to reach climate neutrality by 2050.²CBAM strives to achieve energy transition through a significant reduction in Greenhouse Gas (“GHG”) emissions by 55% by 2030.³In simple terms, the CBAM Regulation is a means of levelling the playing field so that goods made outside the EU are subject to the same carbon tax/levy as goods made in the EU, through a CBAM tax which is applicable on all EU-based companies importing iron, steel, cement, aluminium, electricity, fertilisers, hydrogen (“CBAM goods“), and certain upstream and downstream products in pure or processed form from non-EU countries.⁴  The CBAM Regulation also states that “the ultimate objective of the Carbon Border Adjustment Mechanism (“CBAM“) is a broad product coverage”⁵, hinting that the scope of CBAM may be expanded to other goods, including goods further down the value chain that may be subject to carbon leakage.

CARBON LEAKAGE 

Climate change is a global challenge that demands global solutions. As the EU increases its efforts to combat climate change, there is a risk of “carbon leakage” if other countries fail to implement stringent climate policies. The term carbon leakage describes a scenario wherein a company chooses to move their manufacturing unit to another country with less stringent emissions/climate regulations due to the expenses associated with climate policy.⁶ This occurs as entities having significant carbon emission intensity tend to move from countries having higher carbon mitigation regulations to countries having a neglectful approach towards climate change.⁷

Carbon leakage poses a serious threat to energy transition as it can lead to an increase in global emissions and jeopardise efforts taken to reduce GHG emissions. The CBAM Regulation attempts to tackle the issue of carbon leakage by ensuring equal carbon taxes/levies for domestic and imported products. Essentially, CBAM will operate in a similar manner to the European Union Emission Trading System (“EU ETS“) by requiring importers to purchase CBAM certificates. The price of the certificates will be determined based on the weekly average auction price of EU ETS allowances, denominated in Euro per tonne of CO₂ emitted. Importers will need to register with national authorities and obtain CBAM certificates either directly or through a designated representative. 

PHASE-WISE IMPLEMENTATION OF THE CBAM

1. Transitional Phase: From 1 October 2023 to 31 December 2025, the EU has entered the transitional phase of implementing the CBAM. During the transitional phase, EU importers importing products from non-EU countries covered under the scope of CBAM are obligated to report the embedded emissions of their imports. Embedded emissions refer to direct emissions released during the production of goods, calculated pursuant to the methods set out in Annex III of the CBAM Regulation. No financial implications will be incurred by the importers during the transitional phase.⁸ 

2. Implementation phase: From 1 January 2026 onwards, CBAM goods entering the EU will be charged with a carbon tax based on the emissions generated during the production process. Importers in the EU will need to procure CBAM certificates equivalent to the amount of GHG emissions generated by the imported products. The CBAM tax will be benchmarked to the EU ETS price, which is approximately 52.79 Euro/tonne Co₂ as of 22 February 2024.⁹

REPORTING OBLIGATIONS¹⁰

During the transitional phase of the CBAM, a number of compliance and reporting standards must be followed by importers, their representatives, brokers, and certain other supply chain participants.¹¹ Importers are required to provide a quarterly report disclosing the GHG emissions generated by the imported products (“CBAM Report“). The CBAM Report must include the following:

1. the total quantity of each type of goods, expressed in megawatt hours for electricity and in tonnes for other goods;
2. the actual total embedded emissions, expressed in tonnes of CO₂e emissions per megawatt-hour of electricity or for other goods in a tonne of CO₂e emissions per tonne of each type of goods;
3. the actual total embedded indirect emissions, expressed in tonnes of CO₂e emissions per tonne of each type of other goods than electricity;
4. the carbon price due in the country of origin for the embedded emissions in the imported goods, which is not subject to an export rebate or other form of compensation on exportation.

The CBAM Regulation imposes a penalty of 10- 50 Euro per tonne of unreported emissions on entities who fail to failure to comply with the reporting obligations. This amount is subject to increase if the importer submits two incomplete or incorrect disclosure reports consecutively or fails to submit the disclosure reports for more than 6 months.¹²

CBAM CERTIFICATES 

To import CBAM goods to the EU, importers will have to purchase and surrender CBAM certificates. The CBAM Regulation sets out detailed rules on CBAM certificates, including their sale, surrender, re-purchase, and final cancellation. After the transitional phase, by 31^st May of each year, an importer will be required to surrender a certain quantum of CBAM certificates to the competent authority of each member state. The surrendered CBAM certificates should correspond to the embedded emissions declared for the calendar year preceding the surrender and the price of these CBAM certificates will be the average price of the closing prices of EU ETS allowances on the common auction platform. Failure to surrender a necessary number of CBAM certificates by the prescribed timeline will lead to a monetary fine equal to that under the EU ETS i.e. 100 Euro for each tonne of CO₂ emitted.

IMPACT ON INDIAN BUSINESSES 

India is among the top 8 countries that will be affected by CBAM. In 2022-2023, the EU accounted for 16.59% of India’s exports, with base metals accounting for approximately 9.6% of the exports from India.¹³ Some reports suggest that the CBAM Regulation will translate into a 20-35% tax on steel, aluminium, and cement imports into the EU starting 1 January 2026, which currently attracts a duty of less than 3%.¹⁴ Despite lower per capita emissions by India, the CBAM tax is likely to reduce demand for India imports, which would ultimately lead to trade diversion from India.  Business disruptions will be a likely consequence, at least until the industries in India take steps to reduce their carbon emissions and improve production technology.¹⁵

INDIA’S RESPONSE

The Government of India has acknowledged the challenges posed by CBAM. The Minister for Commerce and Industry recently stated that the Government is planning to challenge the CBAM Regulation before the WTO and will attempt to get a fair deal for Indian export entities.¹⁶ India has also participated in earlier attempts along with BRICS members and other low and middle-income countries, in raising concerns over the trade implications of CBAM. Alternatively, the Government of India has kept an open channel of communication with EU authorities to negotiate a considerate position for Indian exports.¹⁷ To address concerns around the implementation of the CBAM Regulation in the EU, the Government of India has also proposed taxing products that produce high-carbon emissions in India. The Minister of Commerce and Industry has stated that the Government is planning to develop a domestic carbon pricing and taxation model that would allow Indian authorities to collect taxes on carbon-intensive exports to counter the tax under the CBAM. The collected tax could then be utilised to provide incentives to Indian businesses to transition to more environment-friendly sources of production.¹⁸  In addition, the Ministry of Power has released a Carbon Credit Trading Scheme 2023¹⁹ to develop a mechanism of carbon pricing, similar to the EU ETS, for domestic producers/exporters. The Government has also shifted its focus towards building capacity to integrate green hydrogen as an industrial feedstock for heavy industry²⁰ and to promote technologies like carbon capture utilisation and storage,²¹ in an attempt to decarbonise Indian exports. 

CONCLUSION

In summary, the implementation of CBAM can enhance energy security, mitigate climate change, and accelerate the transition of the EU to a net-zero economy by addressing carbon leakage, promoting renewable energy production and innovation, and aligning trade policy with climate objectives. However, some provisions of the CBAM come across as protectionist and non-compliant with the WTO principles. In February 2024, the Minister for Commerce and Industry stated that India is concerned about the CBAM and will take up the issue before the World Trade Organisation and will also look to address the issue bilaterally with the EU. In the meantime, India may consider diversifying the export basket by promoting goods and services with a lower carbon footprint and focusing on sectors that are less susceptible to carbon-related trade barriers, such as information technology services, and sustainable agriculture. But with other CBAM-like carbon tax mechanisms under consideration amongst advanced economies (UK CBAM and US CBAM),²² India may just find it more viable to develop a robust green export-oriented industry.

    [1] Available at:
    https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2023.130.01.0052.01.ENG&%3Btoc=OJ%3AL%3A2023%3A130%3ATOC .

    [2] Available at:
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    [3] Available at:https://www.consilium.europa.eu/en/policies/green-deal/fit-for-55-the-eu-plan-for-a-green-transition/ - :~:text=Fit%20for%2055%20refers%20to,line%20with%20the%202030%20goal.
    

    [4] Available at:https://www.twobirds.com/en/insights/2023/global/what-are-the-implications-of-the-carbon-border-adjustment-mechanism#:~:text=The%20CBAM%20reporting%20duty%20concerns,to%20be%20expected%20by%202026.

    [5] Recital 30 of the CBAM Regulation.

    [6] Available at:https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/free-allocation/carbon-leakage_en

    [7] Available at:https://clear.ucdavis.edu/news/what-carbon-leakage

    [8] Available at:https://icapcarbonaction.com/en/news/eu-carbon-border-adjustment-mechanism-cbam-takes-effect-transitional-phase

    [9] Available at:https://ember-climate.org/data/data-tools/carbon-price-viewer/

    [10] Available at:https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=PI_COM:Ares(2023)4079551

    [11] Available at:https://globaltaxnews.ey.com/news/2023-1719-eu-compliance-obligations-for-eu-cbam#:~:text=The%20reporting%20obligation%20will%20apply,embedded%20in%20the%20goods%20imported 

    [12]  Article 16 of the CBAM Regulation.

    [13] Available at:https://www.lexology.com/library/detail.aspx?g=73df87fe-6bca-4f4b-b383-e95653ba88e0
    

    [14] Available at:http://gtri.co.in/3-GTRI report on Carbon Border Adjustment Mechanism.pdf

    [15] Available at:https://www.osborneclarke.com/insights/eus-carbon-border-adjustment-mechanism-and-its-impact-indian-businesses

    [16] Available at:https://timesofindia.indiatimes.com/business/india-business/india-will-not-accept-unfair-taxes-on-steel-aluminum-industry-piyush-goyal-on-eus-carbon-tax/articleshow/105035865.cms?from=mdr

    [17] Available at:https://www.bloomberg.com/news/articles/2023-06-06/india-prefers-negotiating-with-eu-on-carbon-tax-to-wto-complaint?leadSource=uverify%20wall


    [18] Available at:https://www.reuters.com/world/india/india-weighs-local-tax-options-avoid-eu-carbon-levy-minister-2023-11-02/

    [19] Available at:https://beeindia.gov.in/sites/default/files/CCTS.pdf 

    [20] Available at:https://www.niti.gov.in/sites/default/files/2022-06/Harnessing_Green_Hydrogen_V21_DIGITAL_29062022.pdf

    [21] Available at:https://mopng.gov.in/en/page/33

    [22] Available at:https://ccsi.columbia.edu/content/event-highlights-carbon-border-adjustments-eu-us-and-beyond