Potential implications of the EU's Carbon Border Adjustment Mechanism

In May 2023, the European Union (EU) implemented the Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage risks associated with its ambitious climate policies. Examining CBAM in conjunction with the EU Emissions Trading System (EU ETS), the paper highlights potential CBAM implications and discusses proposals to address key issues. CBAM is likely to impact exporters’ profitability and trade competitiveness, favouring nations with faster decarbonisation ability and robust carbon pricing systems. The paper advocates for non-EU countries to strengthen their emissions monitoring, reporting, and verification (MRV) systems and carbon pricing frameworks. For India, changing the nomenclature of the coal component under the GST Compensation Cess to a ‘carbon tax’ could be considered to reduce industries’ potential carbon liabilities. The development of India’s national emissions trading system could consider CBAM-related impacts, international standards, and insights from other jurisdictions, to strengthen its carbon market and achieve its climate commitments. Lastly, the paper highlights the need for a task force under the leadership of the Prime Minister for continuous engagement on evolving carbon market issues and the dynamic global trade landscape.