Implications of Carbon Border Adjustment Mechanism: a case of India’s exports to European Union

Abstract

Globalization has integrated national and regional economies into a single vast global economy opening up several prospects of growth and dynamic development, largely because of increased opportunities for international trade (Surugiu, et al. 2015). Now governments around the world have liberalized their trade and financial markets, resulting in intensified flow of goods, capital and services within countries, providing economic benefits. However, this has also resulted in degrading of Earth’s environment. The situation has become so grim, that the occurrence of climate-induced natural hazards is now a frequent event. Carbon neutrality (or net zero emission) has been proposed as a solution to anthropogenic climate change and more countries are committing to reach carbon neutrality by the middle of this century. An example of these is the European Union (EU), which wants to become the first region in the world to commit to net zero emissions by 2050. Its carbon neutrality strategy document, ‘European Union Green Deal (EUGD)’, along with other provisions includes taxing imported goods based on carbon embodied in production, known as Carbon Border Adjustment Mechanism (CBAM). The CBAM suggests taxing the difference between carbon embodied in domestically produced and imported goods. The adjustment mechanism is based on the idea that a price on carbon consumption will encourage countries to adopt cleaner technologies in production process, along with avoiding carbon leakages to other countries with relaxed environmental standards. This paper tries to understand the concept, rationale, proposed working and discussions around CBAM. It also tries to examine the possible effect of CBAM on carbon intensive and trade exposed (CITE) sectors in India. The paper concludes that iron and steel will be the sectors most affected from CBAM in India and suggests that India and EU must harness increased international cooperation (through Free Trade Agreement) to fulfill twin purposes of economic development and environmental conservation.