Key Terms & Concepts — UPSC Mains
Carbon Border Adjustment Mechanism (CBAM)
"A trade measure that imposes a carbon price on imports from countries with weaker climate policies to prevent carbon leakage"
The Carbon Border Adjustment Mechanism (CBAM) is a policy tool that places a carbon price on goods imported from countries that have not implemented equivalent carbon pricing policies. Its primary goal is to prevent 'carbon leakage' — the relocation of carbon-intensive production to countries with weaker emissions regulations, which would undermine domestic carbon pricing by making local industry uncompetitive. The EU's CBAM, which began its transition phase in October 2023, is the world's first such major mechanism.
High-relevance for GS3 (environment, trade) and GS2 (India's trade policy, international relations). India is directly affected as a major exporter of steel, aluminium, cement, fertilisers, and electricity — all covered under EU CBAM.
- 1 EU CBAM covers: Cement, Iron/Steel, Aluminium, Fertilisers, Electricity, Hydrogen
- 2 Transition phase: October 2023 – December 2025 (reporting only, no payments)
- 3 Full implementation: From January 1, 2026 (importers must buy CBAM certificates)
- 4 Certificate price: Linked to EU Emissions Trading System (ETS) carbon price (~€60–80 per tonne CO₂)
- 5 India's concern: India exported ~USD 8.2 billion to EU in CBAM-covered sectors (2022); this could face significant additional costs
- 6 WTO implications: India has challenged CBAM at WTO as potentially discriminatory (violates MFN principle, Article I GATT)
- 7 India's response: BIS quality standards; domestic carbon pricing debates; India's own carbon market (Energy Conservation (Amendment) Act 2022 mandates Carbon Credit Trading Scheme)
- 8 Other countries developing CBAM: UK, Canada, Australia exploring similar measures
- 9 Carbon leakage: When high-carbon industries shift to countries without carbon pricing — undermining the purpose of domestic carbon taxes
An Indian steel manufacturer exporting to the EU from January 2026 must declare the embedded CO₂ in each tonne of steel. If the embedded carbon is higher than what would be allowed under EU ETS rules, the importer pays a CBAM certificate at the EU carbon price — effectively making Indian steel more expensive relative to low-carbon alternatives.