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Understanding the EU Carbon Tax (CBAM) and India's Role



  Oct 21, 2023

EU's Carbon Border Adjustment Mechanism (CBAM) and Its Impact on India


1. What is the EU carbon tax or CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is an EU initiative aimed at equalizing the carbon cost between EU and non-EU producers. It imposes a tax on carbon-intensive imports from non-EU countries, ensuring that both domestic and foreign producers are subject to a similar carbon price.
 

2. When will CBAM be implemented?

CBAM's transitional phase began on October 1, 2023, and will last until the end of 2025. During this time, Indian exporters must provide data on embedded emissions in their products. Financial implications of CBAM will take effect from January 1, 2026.
 

3. How is the CBAM levy calculated?

The CBAM rate is determined by the carbon intensity of the exported products and the average price of EU Emission Trading System (ETS) carbon allowances. For certain products like steel and aluminium, the potential carbon tax could be 20-35% of tariffs.
 

4. What is the EU ETS?

The EU ETS is a cap-and-trade system to reduce greenhouse gas emissions by setting emission caps for specific sectors. Companies receive emission allowances, and if they exceed their allocation, they must purchase additional allowances from the carbon market.
 

5. Why does India want to collect the carbon tax?

India's proposition to collect the carbon tax ensures that polluting industries pay for their emissions, aligning with the EU's CBAM objective. The revenue could help India achieve its climate goals.
 
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