A New Frontier in Global Trade: The Carbon Border Adjustment Mechanism

Author: Bhasati Uzir

Imagine a world where businesses could relocate to countries with weaker environmental regulations to avoid paying for pollution. This practice, known as "carbon leakage," has been a significant challenge for countries like the European Union (EU) as they strive to reduce their carbon emissions.

To combat this issue, the EU introduced the Carbon Border Adjustment Mechanism (CBAM) in 2019. This innovative policy aims to level the playing field for European companies that are working hard to reduce their carbon footprint.

How does the CBAM work?

The CBAM essentially imposes a tax on imported goods that don't meet the EU's carbon pricing standards. This means that companies importing goods from countries with less stringent environmental regulations will have to pay a fee to offset the carbon costs that European companies face.

The Impact on Developing Countries

The CBAM could have both positive and negative consequences for developing countries. On one hand, it could incentivize these countries to adopt cleaner technologies and reduce their carbon emissions. On the other hand, it could increase the costs of exporting goods to the EU, making them less competitive.

India's Balancing Act

India, a major exporter of goods to the EU, is particularly vulnerable to the CBAM's impact. However, it also possesses unique opportunities to mitigate its effects. India's reliance on energy-intensive industries like steel and aluminum makes it particularly susceptible to the CBAM. However, India also has immense potential for renewable energy, which could help it reduce its carbon footprint and comply with the CBAM's requirements.

The Road Ahead

The CBAM is a complex issue with far-reaching consequences. As the EU continues to implement this policy, it's crucial for developing countries like India to carefully assess its potential impacts and develop strategies to minimize negative consequences while maximizing the benefits.

Key Takeaways:

• The CBAM could increase costs for developing country exporters.

  
  

• It could also incentivize the adoption of cleaner technologies.

  
  

• India faces unique challenges and opportunities due to its reliance on energy-intensive industries and its potential for renewable energy.

  
  

• Developing countries need to adopt comprehensive strategies to address the impacts of the CBAM.

Sources

• Centre for Global Development: https://www.cgdev.org/blog/eus-carbon-border-tax-how-can-developing-countries-respond#:~:text=CBAM%20will%20have%20impacts%20on,of%20the%20major%20economies%2F%20regions. 

  
  

• World Economic Forum: https://www.weforum.org/agenda/2022/12/cbam-the-new-eu-decarbonization-incentive-and-what-you-need-to-know/ 

  
  

• SAIIA: https://saiia.org.za/research/the-impact-of-the-cbam-on-african-economies-and-the-role-of-the-afcfta/#:~:text=The%20CBAM%20is%20likely%20to,becoming%20uncompetitive%20in%20European%20markets. 

  
  

• UNCTAD: https://unctad.org/system/files/official-document/osginf2021d2_en.pdf 

  
  

• European Commission: https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en

• International Institute for Sustainable Development: https://www.iisd.org/publications/europe-union-carbon-border-adjustment-mechanism

• World Bank: https://www.worldbank.org/en/data/interactive/2023/06/15/relative-cbam-exposure-index