Description

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Context:

Recently, the EU has acknowledged the concerns of India about the implementation of CBAM.
Carbon Border Adjustment Mechanism (CBAM) was introduced by the European Union to address carbon emissions associated with imported goods.
The European Union's Carbon Border Adjustment Mechanism came into effect on October 1, 2023.

About CBAM

Purpose: CBAM is created to impose tariffs on carbon intensive products entering the EU.
It also aims to prevent carbon leakage. This means that relocation of production to non EU countries with low or no carbon costs.
It is made to ensure fair pricing for the carbon emissions associated with goods entering the EU.
This will encourage cleaner industrial practices in non EU countries & prevent the climate goals of the EU from being undermined.
Carbon certificates: in this, EU importers are required to purchase carbon certificates, which is equivalent to the price they would have to pay if they were produced within the EU.
The price of these certificates will be decided by the EU carbon credit market.
The number of certificates required will depend on the volume of goods & their carbon emissions.
If the country of production already has a carbon price applied to goods, then associated certificate costs can be deducted.
WTO compatibility: CBAM is made to be compatible with World Trade Organisation rules, so it does not violate global trade agreements.

Implementation Timeline

Transitional phase (2023-2025): During this period, only reporting obligations exist for EU importers, with no financial obligations.
Definitive phase (from 2026): The full system will apply from 2026, including financial obligations for carbon certificates.

Coverage of CBAM

This will initially apply to goods from carbon intensive sectors. Which are mostly prone to carbon leakage:
- Iron and steel (including some downstream products like bolts)
- Cement
- Fertilizers
- Aluminium
- Electricity
- Hydrogen

About European Union (EU)

Feature	Key Points
Type	It is Political & economic union
Members	It has 27 member states (formerly 28, the United Kingdom left in 2020)
Purpose	It also Promote peace, prosperity, & cooperation among European nations
Key Institutions	It has European Parliament, European Council, European Commission, Court of Justice of the European Union
Currency	Euro (€) (used by 20 member states)
Key Policies	It has Single market, customs union, common agricultural policy, common foreign & security policy
Core Values	It also respect for human dignity, freedom, democracy, equality, the rule of law, & respect for human rights
Official languages	24 official languages
Main location of governing bodies	Brussels.
United Kingdom	UK Left EU on January 31, 2020. This event is also known as Brexit.

Source: TH

PRACTICE QUESTION

Q. Discuss the implications of the European Union's Carbon Border Adjustment Mechanism (CBAM) on global trade, with specific reference to its potential impact on India. 250 Words