EU mechanism to track carbon intensive imports is an opportunity for India

Indian industry has made commendable progress in becoming energy efficient and less carbon intensive

The Carbon Border Adjustment Mechanism (CBAM) Regulation of the European Union (EU) has been notified. It would be enforced in a transitional phase from October 1 this year when reporting of embedded carbon in designated categories of carbon-intensive imports would be required. For the EU this is a ‘landmark tool to put a fair price on the carbon emitted during the production of carbon-intensive goods entering the EU and to ensure that "the carbon price of imports is equivalent to the carbon price of domestic production". With CBAM the movement towards decarbonisation and net zero would cover consumption along with production in the EU.

 

It would initially apply to the carbon-intensive sectors of cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. The list would be progressively enlarged. The EU’s Embedded Trading System (ETS) of paying a price for the embedded carbon in imports would begin on January 1, 2026. According to the EU, the CBAM has been designed to be compatible with WTO rules.

The transition period from this October to January 2026—from reporting to actually paying a price for embedded carbon—provides enough time for the methodology of reporting embedded carbon to become fair, transparent and robust. It also gives space to all stakeholders to prepare and adjust to the new regime. The price signal would incentivise exporters to the EU to make their production process as well as their supply chain less carbon-intensive. Decarbonisation of industry on a global scale would get greater momentum. Other major economies would face calls from environmental activists to emulate the CBAM.

The natural response, emanating from the principle of common but differentiated responsibility and climate justice, would be to see the CBAM as an unfair trade practice. However, CBAM is a reality now. A dispute could be raised with the WTO. But given the imperative need for faster decarbonisation, a ruling against the EU would seem unlikely. The impact of CBAM on different countries would vary. The maximum impact would be on China, the factory of the world. It has huge manufacturing capacities. Refurbishing these plants to reduce carbon intensity would have a cost. It may not be feasible in all cases. For these, in addition to the cost of creating new green manufacturing capacity would be the added cost of the write offs of existing assets.

For India the impact would be notional as we hardly export any carbon-intensive goods to the EU. We are better placed at this juncture. Most of our manufacturing capacity is yet to come up. Thanks to the good work done by the Bureau of Energy Efficiency (BEE) over the years, Indian industry has been making commendable progress in becoming more energy efficient and less carbon-intensive. Our cement industry is one of the most energy efficient in the world. The steel industry has made substantial progress and is forward looking. Many firms are already implementing measures for reducing carbon intensity and ultimately becoming net zero. We have launched a Hydrogen Mission to create a supply chain for substituting fossil fuels with green hydrogen in industry and that too at globally competitive costs.

There is, therefore, a major opportunity for India to create green competitive manufacturing capacity, comply with CBAM, and be able to supply goods to the EU without facing a price disadvantage. There is enough time for the government to steer rapid green industrialisation with specific supporting measures that could be evolved in consultation with Industry. This would be an ideal supplement to the production-linked incentive (PLI) scheme. Conceptually it would have to be viability gap funding. It could take the form of an interest subsidy, capital grant, or lower GST rates for industries that would be coming under CBAM in this decade. Fortunately, we are at a sweet spot now with many global firms wanting to bring their supply chains to India. Success in manufacturing, which has been eluding us so far, could be in our reach over the next few years if we move swiftly with pragmatism and ambition.

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The author is a distinguished fellow, Institute of Studies in Industrial Development, and former secretary, DIPP, Government of India.

These are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the 'Business Standard' newspaper.