What is CBAM – Carbon Border Adjustment Mechanism

What is CBAM (Carbon Border Adjustment Mechanism)?

Understanding CBAM

Carbon Boarder Adjustment Mechanism (CBAM) is a landmark tool to put a fair price on carbon emissions from energy intensive industries by the European Union. Essentially EU’s new carbon tax. The aim is to prevent carbon leakage by subjecting the import of certain groups of products from non-EU countries to a carbon levy linked to the carbon price payable under the EU emission trading system (ETS) when the same goods are produced within the EU.

CBAM Compliance Implementation

The CBAMs transitional period started on 1^st October 2023 and ends on 31^st January 2024, during this phase the importers of CBAM goods are required to submit quarterly reports with the following content:

1. Quantities in which CBAM goods imported during the quarter, specified per country of origin per production site where the goods are produced.
2. The embedded direct (if applicable, indirect) greenhouse gas emissions thereof;
3. Carbon price due to country of origin (if applicable).

In case any challenges are faced by the reporting declarant for obtaining emissions data during the transactional period, they have some alternative options for reporting emissions values, the period ends on 31^st December 2024, the corresponding monitoring and reporting methods are below:

1. A carbon pricing scheme where the production site is located
2. A compulsory emission monitoring scheme where the production site is located
3. An emission monitoring scheme at the production site which can include verification by an accredited verifier

The full scope of the CBAM regulation will come into force on 1^st January 2026. From this date onwards the importers will need to obtain authorization to import CBAM goods, declare every year the quantity of CBAM goods imported into the EU in the preceding year and their embedded greenhouse gas emissions and surrender CBAM certificates to cover the declared emissions.

CBAM Road Map

Indian Scenario & The Sectors Covered Under CBAM

Currently the followings sectors are covered under first phase of CBAM:

• Iron & Steel
• Fertilizers
• Aluminum
• Cement
• Electricity
• Hydrogen

When it comes to India’s export market, it will have an adverse impact on sectors like iron & steel and aluminium products to the EU. These sectors will face higher scrutiny under the CBAM mechanism. The major exports to the EU are iron ore & steel will face a significant threat due to the carbon ranging from 19.8% & 52.7 %. When it comes to the carbon intensity of Indian products it is significantly higher than that of the EU and many other countries because coal dominates the overall energy consumption. The proportion of coal-fired power in India is close to 75%, which is much higher than EU. The EU has coal-fired power is approximately 15% and the global average is around 36%. The direct and indirect emissions from the production process of Iron & steel and aluminium sectors will become a major concern for the Indian exporter’s market.

The competitiveness of the Indian market with other countries, India doesn’t have any domestic carbon pricing scheme up to date but implementing decarbonization principle can help the along with nations domestic policies like national steel policy, production linked incentive will help to increase production along with reduction in emissions. By adding clean technologies and financing mechanisms will make India’s production sector more carbon efficient.

Keywords: CBAM India, CBAM Reporting Services, CBAM Reporting Requirements, CBAM implementation India