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India's Response to CBAM: Trade and Climate Implications.



  Oct 27, 2023

Carbon Border Adjustment Mechanism (CBAM) and India



Q1: What is CBAM?

A1: CBAM stands for Carbon Border Adjustment Mechanism, a policy proposed by the European Union (EU) to impose a carbon tax on certain imports into the EU.

Q2: Why is CBAM Introduced?

A2: CBAM is introduced to address carbon leakage, where industries move to regions with lax environmental regulations, leading to higher global emissions. It ensures that imports into the EU meet the EU’s climate goals.

Q3: When Does CBAM Start?

A3: CBAM is scheduled to take effect from January 1, 2026.

Q4: Which Industries Does CBAM Initially Apply To?

A4: Initially, CBAM applies to sectors like steel, aluminium, cement, fertilizer, hydrogen, and electricity. However, it is expected to expand to cover all imports into the EU eventually.

Q5: How Will CBAM Impact India’s Exports?

A5: CBAM could raise the cost of India’s exports to the EU by 20-35%, affecting industries heavily reliant on EU exports.

Q6: What is India’s Response Strategy to CBAM?

A6: India is considering a two-track approach: resisting CBAM in multilateral forums and exploring the possibility of imposing a reciprocal tax on exports to the EU.

Q7: What Is the Potential Impact of India’s Reciprocal Action?

A7: The funds collected from the reciprocal tax could be used to improve environmentally friendly processes, potentially leading to reduced taxes in the future.

Q8: How Might CBAM Impact Global Trade?

A8: India’s response strategy could inspire other exporting countries with carbon credit markets to take similar actions.

Q9: What Challenges Does CBAM Pose?

A9: CBAM is viewed as a non-tariff barrier, may affect zero-duty Free Trade Agreements (FTAs), and presents complexities in handling global firm-level data.
These FAQs provide a comprehensive overview of CBAM and its implications, along with India’s response strategy.

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