EU Planning to Include 180 More Products Under CBAM

Syllabus: GS3/ Economy, GS3/ Environment

Context

• The European Commission has proposed expanding the scope of the Carbon Border Adjustment Mechanism (CBAM) to include around 180 additional products from January 1, 2028.

Carbon Border Adjustment Mechanism (CBAM)

• CBAM is the European Union’s tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.
• CBAM is one of the elements of the EU Green Deal, the goal of which is to reduce GHG emissions by 55% by 2030. 
• CBAM is aimed at equalizing the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) and imported goods.
  • It refers to a phenomenon where a EU manufacturer moves carbon-intensive production to countries outside the region with less stringent climate policies. Its primary objective is to avert ‘carbon leakage’. 

What are the Proposed Key Changes?

• The expanded list is expected to include fabricated metal products, tubes, pipes, fasteners, machinery parts, aluminium containers, and other semi-finished and finished goods.
• The proposal seeks to extend CBAM beyond raw materials to cover products across the manufacturing value chain.
• It also includes stricter carbon accounting rules, including emissions from pre-consumer scrap used in production.
• Rationale Behind Expansion: 
  • The expansion aims to address the risk of carbon leakage in downstream sectors of manufacturing.
  • The expansion seeks to prevent firms from shifting emission-intensive stages of production to countries with weaker climate regulations.

Implications for India

• Trade Competitiveness: The expansion of the Carbon Border Adjustment Mechanism will affect India’s exports worth $74.8 billion to the European Union, reducing competitiveness in key sectors like steel and aluminium.
• Macroeconomic Impact: CBAM is projected to cause a 0.05% loss in India’s GDP, with carbon-intensive sectors forming 10% of India’s exports to the EU.
• MSME Vulnerability: MSMEs dominate sectors like fabricated metals and engineering goods but lack capacity for costly emissions monitoring and reporting systems, increasing risk of market exclusion.
• Compliance Burden: Exporters must invest in carbon accounting, third-party verification, and supply-chain traceability, which significantly raises transaction costs.
• Trade Diversion: Indian exporters may shift away from the EU to alternative markets, often with lower margins and demand stability.

Policy Recommendations for India

• Targeted Support to MSMEs: The government should provide financial incentives, subsidies, and technical assistance to MSMEs for Emissions monitoring systems and Carbon reporting compliance.
  • A dedicated CBAM readiness fund can prevent MSME exclusion from EU markets.
• Accelerate Industrial Decarbonisation: India should promote low-carbon technologies in hard-to-abate sectors like steel, cement, and aluminium. This includes scaling up Green hydrogen, Electric Arc Furnaces (EAF) and Renewable energy integration.
• Domestic Carbon Pricing Framework: India should establish a credible carbon pricing mechanism (carbon market or tax) to align with global standards and reduce the burden under the Carbon Border Adjustment Mechanism.

Concluding remarks

• The expansion of the CBAM reflects a deeper shift in the global economic order, where carbon efficiency is emerging as a new determinant of comparative advantage.
• For India, this development is not merely a trade challenge but a strategic inflection point that demands alignment between industrial growth and climate responsibility.
• Ultimately, India’s ability to transition from a cost-driven to a carbon-efficient manufacturing economy will determine its position in the evolving architecture of global trade.

Source: TH