Introduction
As the world ramps up its efforts to combat climate change, the carbon border adjustment mechanism (CBAM) has emerged as a key instrument in the effort to reduce carbon emissions. The CBAM aims to provide domestic industries with a level playing field while also ensuring that imported goods meet comparable environmental standards. In this blog, we’ll explore the intricacies of the CBAM system, its impact on global trade, its impact on environmental policy, and its potential to transform the future of global commerce and sustainability efforts. Read on to find out more about CBAM and how it could shape the future of global trade.
Like an import duty, the carbon tax aims to ensure imported goods meet the same environmental standards as domestically produced goods. The tax is set to take effect on 1 January 2026, but the process starts earlier. Domestic companies in seven carbon-intensive industries (steel, cement, fertiliser, aluminium, chemical industry, refining and power generation) are required to share carbon emission data with the EU as of October 1 of the previous year.
Understanding CBAM’s rationale
The EU’s support for CBAM is rooted in its desire to ensure that its domestic industries maintain a high level of environmental compliance. The EU states that, without measures such as CBAM, its industries would suffer as a result of lower environmental standards being imported from other countries. Therefore, CBAM is both a means of protecting domestic industries and a means of encouraging global compliance with environmental regulations.
How is India facing challenges with the EU’s CBAM?
For India, the EU’s CBAM poses a multifaceted challenge. On one hand, there is the immediate economic impact of potential import tariffs on carbon-intensive goods. On the other, there are broader implications for India’s role in global climate action and trade dynamics. As the world grapples with the urgency of climate change, India faces the task of formulating its own carbon taxation measures that align with global climate goals while safeguarding the interests of its industries.
The way forward will require a delicate balance between economic, environmental and diplomatic considerations. As the EU embarks on its carbon border tax initiative, the global community including India will need to engage in meaningful dialogue and cooperation to ensure that environmental goals are achieved without jeopardising economic growth and global trade relationships.
CBAM is similar to the EU’s ETS which caps greenhouse gas emissions. Until December 2025, EU producers and importers in energy-intensive industries were able to report their embedded emissions without incurring any financial penalties. From 1 January 2026, however, the definitive phase kicks in and importers must surrender their corresponding CBAM certificates each year when they report their embedded emissions.
Navigating India’s Response to CBAM
India has initiated efforts toward its own carbon trading mechanism. Amending the Energy Conservation Act of 2001, in December 2022, India introduced the Carbon Credit Trading System (CCTS), aiming to combat climate change by incentivising emission reduction actions and increasing private sector investments in clean energy.
India, among the top eight countries (China, India, Russia, United States, Brazil, South Korea, Japan and Germany) to be adversely impacted by CBAM, faces limited options within this framework. It could challenge CBAM as violative of the common but differentiated responsibilities principle under the Paris Agreement. Alternatively, the EU could collect taxes and reinvest in green technologies in affected countries. India has already raised objections to CBAM at the World Trade Organisation under special and differential treatment provisions.
The enforcement of CBAM by the U.K. by 2027 adds to India’s challenges, likely disrupting its exports in the years ahead. As India navigates these complexities, strategic decisions and international collaborations will be pivotal in safeguarding its industries’ interests while advancing its climate commitments.