Keeping India’s Carbon Money at Home: IBAM vs CBAM

What is CBAM?

• The Carbon Border Adjustment Mechanism is a regulatory mechanism introduced by the European Union to impose a carbon cost on imported goods.
• It is designed to ensure that imported products face the same carbon price as goods produced within the EU under its Emissions Trading System.
• The primary objective is to prevent “carbon leakage,” which occurs when industries relocate to countries with weaker environmental regulations to avoid carbon costs.
• The mechanism currently covers carbon-intensive sectors such as cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen.

How CBAM Works?

• Importers in the EU must calculate the amount of greenhouse gas emissions embedded in the imported goods.
• Based on these emissions, they are required to purchase CBAM certificates, whose price is linked to the EU carbon market.
• The number of certificates to be surrendered corresponds directly to the emissions associated with the imported product.
• If a carbon price has already been paid in the exporting country, that amount can be deducted from the CBAM liability to avoid double taxation.
• This mechanism effectively extends EU climate regulations beyond its borders, making global trade sensitive to carbon intensity.

Impact of CBAM on India

• Indian exporters will face increased costs, especially in sectors like steel, aluminium, cement, and fertilisers, which are energy-intensive and carbon-heavy.
• Unlike European industries, Indian industries do not receive comparable subsidies for decarbonisation, leading to an uneven playing field.
• The additional financial burden may reduce export competitiveness and profit margins for Indian firms in EU markets.
• Since the revenue collected through CBAM goes to the EU, India effectively loses potential financial resources linked to its own emissions.
• This raises concerns about fairness, as developing countries bear the cost while developed countries retain the revenue.

India’s Existing Framework: CCTS

• India has already introduced the Carbon Credit Trading Scheme to establish a domestic carbon pricing system.
• Under this scheme, industries can earn and trade carbon credits based on their emission reductions.
• The objective is to create a market-based mechanism that incentivises cleaner production and gradual decarbonisation.
• This domestic carbon pricing system provides a legal basis for India to argue that emissions have already been priced domestically.
• Under CBAM rules, such domestic carbon costs can potentially be deducted, reducing the burden on exporters.

What is IBAM ?

• The India Border Adjustment Mechanism (IBAM) is a proposed policy tool aimed at countering the impact of CBAM.
• Under IBAM, India would impose a carbon-based charge on goods exported to countries that apply CBAM-like measures.
• Instead of allowing foreign jurisdictions to collect carbon-related revenues, this mechanism ensures that such revenues are collected within India.
• The funds generated can then be utilised for domestic purposes such as green infrastructure development, renewable energy expansion, and industrial decarbonisation.
• IBAM essentially transforms a potential external tax burden into an internal resource for sustainable development.

Legal Dimension (FTA & Annex 14-A)

• The India–EU Free Trade Agreement includes provisions for technical dialogue on carbon-related measures under Annex 14-A.
• This framework allows both sides to engage in discussions on how CBAM will be implemented and how domestic carbon pricing systems can be recognised.
• If India successfully aligns IBAM with global norms, it can be treated as a legitimate carbon price paid in the country of origin.
• This would enable Indian exporters to claim deductions under CBAM provisions, thereby avoiding double taxation.
• Thus, IBAM must be carefully designed to ensure compatibility with international trade rules and agreements.

Carbon Leakage & Climate Justice Debate

Carbon Leakage

• Carbon leakage refers to the relocation of industries from countries with strict climate policies to those with weaker regulations.
• This leads to no real reduction in global emissions, as production simply shifts geographically.
• CBAM is intended to address this issue by ensuring uniform carbon costs across borders.

Climate Justice

• Developing countries argue that they have contributed less to historical emissions but are now being asked to bear a disproportionate burden of climate action.
• CBAM is criticised because it transfers the cost of decarbonisation to exporting countries while allowing developed nations to retain the financial benefits.
• India’s proposed IBAM is seen as a corrective step to ensure fairness and equity in global climate governance.

Significance for India

• It helps protect the competitiveness of Indian exports in international markets.
• It prevents the outflow of carbon-related revenues to foreign economies, thereby strengthening domestic financial resources.
• It supports India’s green transition by providing funds for renewable energy and low-carbon technologies.
• It enhances India’s bargaining position in global climate negotiations and trade discussions.
• It aligns economic policy with environmental sustainability, ensuring balanced development.

Challenges

• Designing IBAM in a manner consistent with WTO rules to avoid trade disputes is a major challenge.
• Measuring embedded emissions accurately across industries requires robust data systems and technical capacity.
• There is a risk that additional carbon charges may increase costs for Indian exporters in the short term.
• Institutional coordination between different ministries and regulatory bodies is essential but complex.
• Ensuring transparency and accountability in the use of IBAM revenues is critical for credibility.
• Strengthen domestic carbon markets under CCTS with clear pricing mechanisms and reliable monitoring systems.
• Develop IBAM as a transparent, WTO-compliant policy instrument aligned with international standards.
• Invest in technological upgrades to reduce carbon intensity in key export sectors.
• Use IBAM revenues in a ring-fenced manner for verifiable green projects and climate adaptation initiatives.
• Engage actively in international negotiations to ensure fair recognition of India’s climate efforts.

Conclusion

The introduction of CBAM reflects a new phase where climate policy directly influences global trade dynamics. For India, this creates both a challenge and an opportunity. While CBAM increases the cost burden on exports, the proposed IBAM offers a strategic pathway to retain financial resources and accelerate the domestic green transition. A well-designed policy framework can ensure that India safeguards its economic interests while contributing effectively to global climate goals.