New Delhi: The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) is reshaping global trade and introducing new complexities for economies around the world, especially developing countries. As other G7 countries consider similar measures, we face a number of key questions about how to balance climate goals with economic realities.
Climate think tank Climate Trends organised a webinar to explore the far-reaching implications of CBAM on global trade, supply chains and climate resilience, and discuss the need for equitable climate action across borders. The webinar, titled ‘From Trade Wars to Climate Wars: CBAM’s Role in the New Global Economy’, brought together eminent experts from the fields of trade, economics and climate change to share their views ahead of key multilateral discussions at COP29 and G20. Stressing on the need to formulate an acceptable ‘norms of emission’, Aruna Sharma, former Secretary, Ministry of Steel said, “When we discuss the impact of CBAM on developing economies, we have to start from COP when the world agreed on certain principles. This is very important because then the concerns and concerns of all countries were taken into account. Equally important is the need to formulate an acceptable norm of emission as to what is acceptable amount of carbon emission.”
She added, “Each country will have to decide what is its acceptable norm of emissions. There cannot be a universal definition. This is because the pace at which different sectors of industry will vary as to how quickly they achieve their carbon emission targets, as this will require flow of finance and a mechanism to measure it.
Amitendu Palit, Senior Research Fellow at the Institute of South Asian Studies, National University of Singapore, referring to the difficulties and inconsistencies that may arise in the implementation of CBAM, said, “There are some industries like aluminium, fertilizers, cement, etc. that may face relatively more difficulties in terms of European exports. If you look at services like shipping and aviation, clearly the extended impact of a regulation like CBAM on supply chains is quite wide. I think one particular point that is important to note is that there is a possibility of quick implementation of CBAM and hopefully CBAM will be implemented on its scheduled date. This could have at least a short to medium term impact on supply chains.
“Basically what I mean is that from the perspective of an exporter in the supply chain who is required to comply with the CBAM regulations, it may be the same thing with respect to one set of standards, but the challenge here is that not all enterprises will have the ability to isolate their production in terms of one standard. Now in that case some states and countries may have different ways of looking at their regulations. I don’t think in the medium term any state will really be comfortable in following and promoting two different regulations,” he said.
Claudia Azevedo, Policy Analyst at Europe Jacques Delors Institute, shared her views on how to include developing countries in the ambit of CBAMs, saying, “We are focusing on the implications of these measures (CBAMs and others) for developing countries and providing policy recommendations to the EU on how to best include and support partner countries that are complying with these measures. CBAMs is of course one of these measures. It is an important measure and from the EU’s point of view it is a climate tool. It is something that aims to reflect the South.”
“The EU envisions the emissions trading system and now the reality is the CBAM individualisation to hedge carbon risks, which should not be seen in isolation because as a climate tool it aims to deal with the costs that arise from climate change. So this is where all these concerns related to climate justice come in, but a differentiated principle applies,” she added. This is a concern that is being tried to be addressed and this concern is being expressed very strongly, mainly by developing countries. ”
She said, “The reality is that CBAM is the first large-scale border carbon adjustment and therefore it can become a test case for many countries in the future which face different kinds of challenges. Some of these concerns have been discussed. Although the EU has reiterated its commitment to support partner countries, it is still to be implemented in a practical way. At this time as I said the transition period will end at the end of 2025 and some things are already in place, but there are some things that still need to be implemented. For example, create a national green hydrogen and of course the purpose of this is not only to produce green hydrogen and export it to the EU.”
Anandita Gupta, Fellow at the National Institute of Public Finance and Policy, referring to the perspective of developing economies on CBAM, said that this matter is somewhat linked to the issue of climate justice. Actually, one should look at the logic on the basis of which CBAM was actually implemented or introduced. We have a very high standard of climate, which we want to achieve within the EU, while you also have non-EU countries which have the right standards and this creates a risk of carbon leakage. The issue here is that we have identified this difference in environmental indicators as an issue due to which we want to make a comprehensive adjustment and we want to implement it to a certain extent.
She said, ‘Ironically, a lot of BRICS countries and developing economies see it more as a protectionist measure than the other perspective of seeing it as a barrier to trade. But when you want to look at it from the perspective of climate discourse, we have to understand that we have set our short-term and long-term goals based on our needs and we will start managing it through a comprehensive adjustment mechanism. There is also the fact that the two ends are not meeting. This is a ‘misalignment’ because the Paris Agreement was trying to achieve something else and what the EU is trying to do here is the same. We see the same logic being represented or pushed.”
Sutem Mamele, economist at Sustainable Growth, Trade and Industrial Policy Strategies, referring to the lack of awareness in African countries about CBAM, said that there is a lack of awareness among countries in the African continent. At the moment other continents are able to industrialise, the African continent is struggling to industrialise. It came to light that mechanisms are actually being sought in terms of an international pricing system, which could be a solution for most African countries.
The webinar was moderated by Archana Chaudhary, Associate Director, Climate Trends. She explained that CBAM is actually a set of rules aimed at ensuring fair pricing on carbon emissions for goods entering the EU. The CBAM aims to ensure that the carbon price of imports is equal to the carbon price of domestic production. Also, companies should be discouraged from shifting production to non-EU countries with weak regulation on carbon emissions. In addition, clean industrial production should be encouraged in non-EU countries.
Sets a fair price on the carbon emitted during the production of intensive goods, and encourages clean industrial production in non-EU countries.
CBAM will also ensure that the carbon price of imports is equal to the carbon price of domestic production, by confirming that a price is paid for the underlying carbon emissions generated in the production of certain goods imported into the EU, and that the EU’s climate objectives are not compromised. CBAM has been made WTO-rules compatible.
This gradual introduction of CBAM is in line with the phased elimination of the allocation of free permissions under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry.
CBAM will come into force from 2026, with a transitional phase from 2023 to 2025. CBAM will apply to high carbon emitting commodities such as iron, aluminium and steel. CBAM will impact India’s exports to EU countries, particularly metals such as iron, steel and aluminium. The carbon charges on these commodities range from 19.8% to 52.7%.
