Carbon Border Adjustment Mechanism (CBAM)

Why in News?

Ahead of EU-India FTA talks in September 2025, the government will brief a parliamentary consultative committee on key issues, including agricultural market access and the EU’s Carbon Border Adjustment Mechanism (CBAM), aiming to accelerate negotiations for a year-end deal.

Description:

• Definition: A European Union (EU) tariff on carbon-intensive products imported into the EU.
• Purpose: Prevent carbon leakage – shifting production to countries with lower/no carbon costs.
• Objective: Ensure fair pricing for carbon emissions in imported goods and encourage cleaner industrial production worldwide.
• WTO Compatibility: Designed to comply with World Trade Organization (WTO) rules.

Key Features:

• Imports covered: Goods imported from non-EU countries, including online purchases and gifts.
• Carbon Certificates:
  • EU importers must buy certificates corresponding to the carbon price that would have been paid if the goods were produced in the EU.
  • Price based on EU carbon credit market auction prices.
  • Number of certificates = embedded emissions × quantity of goods imported.
  • Certificates can be reduced if the carbon price is already paid in the exporting country.
  • Countries with a domestic carbon price equivalent to the EU can export without CBAM certificates.

Implementation Timeline:

• Transitional Phase: 1 October 2023 – 2025
  • Obligation: Reporting emissions only, no financial payments.
• Definitive Regime: From 2026
  • Obligation: Importers must buy certificates based on emissions embedded in imported goods.

Products Covered (Initial Phase):

• Iron & steel (including downstream products like nuts and bolts), Cement, Fertilizers, Aluminium, Electricity, Hydrogen

Purpose & Significance:

• Level playing field: Align carbon costs of imports with EU domestic products.
• Incentivize non-EU countries to adopt cleaner production methods.
• Mitigate environmental dumping and protect EU climate targets.

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