The EU's CBAM has lent urgency to fair carbon prices

The EU's Carbon Border Adjustment Mechanism (CBAM) went into force on 1 October 2023. Covering iron and steel, aluminium, cement, fertilizer and electricity, it requires the direct and indirect carbon emissions of these goods to be reported for their import into the EU.

- R.V. ANURADHA

The product categories include specified precursors and are expected to progressively cover more products. Studies by the World Bank and UNCTAD have highlighted that the CBAM could have a significant impact on the competitiveness of developing countries that export the covered goods to the EU.

The CBAM has a transition period. Reporting requirements run till the end of 2025. This is not as innocuous as it sounds. It includes reporting for products as well as specified precursors: (a) direct emissions (those from the production process) and indirect emissions (from the production of electricity consumed); (b) production methods; (c) carbon price paid in the country of origin, etc. Penalties of ₹10-50 would apply for each tonne of unreported embedded emissions.

Beginning 1 January 2026, importers into the EU will need to buy CBAM certificates to account for price differences in embedded emissions between the EU and country of export. The World Bank recently published its CBAM Exposure Index, measured by multiplying a country's export share by the difference between the exporter's emission intensity and the EU average of the same for a CBAM product, scaled by an assumed carbon price of $100 per tonne (a recent high in per tonne price of CO2 in the EU market). By this assessment, there will be a relative decrease in competitiveness of Indian exports.