Carbon Border Adjustment Mechanism

Also called: CBAM · Topic: Climate Change: Causes, Evidence and the Global Response · NCERT: Beyond NCERT

Meaning

The Carbon Border Adjustment Mechanism (CBAM) is a charge set by the European Union (EU). It applies to the carbon given off while making certain goods that are brought into the EU: iron and steel, aluminium, cement, fertilisers, electricity and hydrogen [3].

It matters because it is the first big case of a climate rule being used as a trade rule. It puts a price on some of India's main exports to the EU, especially steel and aluminium. India calls it a unilateral trade barrier (a barrier one side sets up without the other side agreeing).

Explanation

Why the EU made it: to stop carbon leakage

• EU factories already pay for their carbon
• They pay a carbon price under the EU Emissions Trading System (ETS) (a system where factories must hold permits for the carbon they give off).

• This makes goods made in the EU cost more.

• The risk: carbon leakage

• Companies might move their factories to countries that have no carbon price.

• This is carbon leakage: the emissions do not fall. They just move abroad.

• The fix: a charge at the border

• CBAM makes importers pay a carbon price at the EU border, similar to what EU factories pay.
• Goods made in the EU and imported goods then face a similar carbon cost.

How it works: the two phases

• Legal basis: EU Regulation 2023/956.
• Transitional (reporting-only) phase, from 1 October 2023: importers only had to report the emissions in the goods they brought in. They paid nothing [3].
• Definitive phase, from 1 January 2026: importers must buy CBAM certificates (permits that cover the carbon in the imported goods). From this point, CBAM costs real money [3].

Which goods are covered

• Covered: iron and steel, aluminium, cement, fertilisers, electricity and hydrogen [3].
• What they have in common: making them uses a lot of energy and gives off a lot of carbon. These are "hard-to-abate" industries (industries where cutting emissions is difficult).
• Not covered: textiles, ceramics and oil.

Where CBAM fits among climate tools

• Under the Paris Agreement (2015), each country sets its own target, called its NDC (Nationally Determined Contribution: a country's own pledge to cut or limit greenhouse gases).
• There are four kinds of tools that help countries reach these targets: markets (Article 6), forests (REDD+), technology (CCS/CCUS) and trade (CBAM).
• CBAM is the trade tool. It is the only one of the four that one side sets alone. Article 6 and REDD+ work through agreement under the UNFCCC.

Where it occurs

• Where it applies: at the borders of the European Union. It covers goods brought into the EU from any other country.
• Who runs it: the European Union, on its own.
• Law and years: EU Regulation 2023/956. Reporting began on 1 October 2023 and charging began on 1 January 2026 [3].
• India's exposure: steel and aluminium are India's most exposed exports. India's finished steel exports to the EU were worth (in ₹ crore) [1]:
• 10,692 in 2019-20
• 14,144 in 2020-21
• 32,149 in 2021-22
• 22,482 in 2022-23

• 29,534 in 2023-24

• Where India fights it:

• At the WTO (World Trade Organization), India called CBAM protectionist (meant to shield EU industry from competition) and said climate is being used as cover. India says it restricts trade, splits markets apart and raises costs and prices [2].

• India also raises CBAM in its FTA (Free Trade Agreement) talks with the EU.

• What India is doing at home:

• India is building the Indian Carbon Market under the Carbon Credit Trading Scheme. If Indian firms already pay a carbon price at home, the EU charge could in principle be reduced [3].
• India has set emission-intensity targets (limits on carbon given off per unit of product) for aluminium, cement, chlor-alkali and pulp & paper [1].

Don't confuse with

• EU Emissions Trading System (ETS): the ETS sets a carbon price on factories inside the EU. CBAM puts a matching charge on imports at the EU border. CBAM exists to protect the ETS from carbon leakage.
• Carbon leakage: this is the problem, meaning production and emissions move to countries with no carbon price. CBAM is the tool the EU uses against it.
• Article 6.2 (ITMOs): Article 6.2 is a voluntary deal between two countries under the Paris Agreement to transfer emission cuts. CBAM is a one-sided EU trade measure that nobody else agreed to.
• Indian Carbon Market (Carbon Credit Trading Scheme): this is India's own domestic carbon price. It is not part of CBAM, but it could reduce what Indian exporters pay under CBAM [3].

Prelims Hooks

• CBAM goods: iron and steel, aluminium, cement, fertilisers, electricity, hydrogen [3]. Trap: textiles, ceramics and oil are not covered.
• Timeline: reporting-only phase from 1 October 2023. Definitive phase with CBAM certificates from 1 January 2026 [3].
• Legal basis: EU Regulation 2023/956. It is run by the EU alone, not by the UNFCCC or the WTO.
• Aim: to prevent carbon leakage and match the carbon price that EU factories pay under the EU ETS.
• India's legal objection: India says CBAM is inconsistent with basic WTO principles and discriminatory, because certificate costs per tonne differ by producer and by country [2]. India also says it goes against CBDR.
• India's finished steel exports to the EU were ₹29,534 crore in 2023-24 [1].

Mains Points

• Trade–climate clash (GS-III):
• CBAM puts a carbon price on Indian steel and aluminium going to the EU. Steel exports alone were ₹29,534 crore in 2023-24 [1].
• India argues that it breaks CBDR (Common But Differentiated Responsibilities: all countries must act, but rich countries that polluted first should do more). It is one-sided and ignores that developing countries have different duties.

• India also argues that it goes against WTO principles and treats producers and countries differently [2].

• India's response, at three levels:

• Global: raise CBAM at the WTO [2] and in FTA talks with the EU.
• Domestic carbon price: build the Indian Carbon Market under the Carbon Credit Trading Scheme, so that the carbon cost is paid at home and the EU charge could be reduced [3].

• Industry: set emission-intensity targets for aluminium, cement, chlor-alkali and pulp & paper [1], and help MSMEs (small firms) cut their emissions.

• A balanced view:

• CBAM tackles a real problem, carbon leakage. It may also push Indian industry towards cleaner steel and cement.
• But it raises costs for exporters and shifts the climate burden onto developing countries. A fair answer would recognise the carbon prices that countries like India already pay at home.

Related concepts

• Article 6 carbon markets
• REDD+
• Carbon capture and storage

Read more

• Markets, forests, technology and trade: Article 6, REDD+, CCS and CBAM