While the tariff trade has taken the central stage in the current international discourse, there are other trade measures, such as CBAM, silently spreading its wings. Retreat of the United States (US) from the Paris Climate Accord and the upsurge in global environmental trade measures like the EU carbon border adjustment mechanisms (CBAM) have worsened the already paralysed global climate governance. CBAM, a controversial trade protection measure, can significantly distort the global trade order and alter the industrial practices of developing countries in their effort towards industrial decarbonisation and global trade competitiveness. Premised as a mechanism to plug the carbon leakage that may spill from the EU to other countries, as the latter have lax domestic emission standards, the mechanism projects to accelerate the decarbonisation efforts across countries through the imposition of carbon prices on exports to the EU. For instance, while the EU’s carbon price hovered around 80-100 per ton of CO2, in most of the other parts of the world, it remains below 10 per ton, which could be a major factor driving the relocation of the emission-intensive industries away from the EU. To start with, the mechanism aims to cover six high-emission intense sectors: cement, iron and steel, aluminum, fertilisers, electricity, and hydrogen, aiming at minimising the significant risk of carbon leakage from the EU region.
Going against the current of multilateralism
CBAM is espoused by many countries like Brazil, China, and India as a trade barrier and is touted as a unilateral measure by EU. It is argued as a strategically designed protectionist measure by the EU, defying the principles of multilateralism and violating the norms of the World Trade Organisation (WTO). Trade experts argue that CBAM is in contradiction with the Most Favored Nation (MFN) clause under General Agreement on Tariffs and Trade Article I, which calls for equal treatment for “like” products from all WTO members. CBAM, by levying differential tariffs on different products based on the embedded carbon content of the product, breaches the WTO clause of MFN. In addition, the design principle of CBAM is also in conflict with the Common But Differentiated Responsibilities – Respective Capabilities (CBDRRC) principle of UNFCCC, which is considered central to international climate negotiations and driving global climate governance architecture. At the heart of the CBDR-RC principle lies the differential responsibility of nation-states to address climate issues based on the differences in their historical emissions, current capabilities, and developmental priorities of countries. However, CBAM, which levies uniform carbon costs irrespective of developing countries’ emission positions and economic capabilities, undermines the very core of the CBDR principle. By doing so, it adversely impacts the climate governance order, which has already been fractured due to several other reasons.
Breaking the core norms of international climate finance funds flow
Apart from the above, the CBAM, by its design, has provisions to mobilise financial resources for the EU and its member countries. The architecture of such a regulatory measure has made explicit provision for generating revenue through CBAM for the EU and its member countries. Revenue potential estimates indicate that CBAM could mobilise more than $80 billion per year till 2040.
The quantum of the revenue would be dependent on the purchase of CBAM certificates by the EU importers based on the magnitude of embedded emissions of carbon-intensive goods. The price of these certificates would be indexed to the weekly average auction price of EU-ETS allowances to ensure that the importers pay a carbon tariff equivalent to the tariff paid by the EU domestic producers. Starting from the definitive phase of 2026, the revenue collection would be part of the EU’s general budget scheme and would be considered as its ‘own resource’, of which 3/4th will be part of the EU budget, and the remaining will be allocated to EU member states. The funds collected through selling CBAM certificates are intended to further the EU climate goals reinforced through various policy initiatives such as ‘fit for 55’.
Though the specific allocation plan for the revenue to be mobilised through CBAM has yet to get a definitive direction, however, it is caught in controversy due to various reasons. Some stakeholders favour directing these resources to meet the domestic industrial decarbonisation efforts, while others demand diverting a portion of the funds to support developing countries’ climate efforts. Nothing concrete so far has emerged as a formal agreement in deciding the allocation of such resources to developing countries’ climate actions, though pressure to allocate such funds to developing countries is escalating over time from a climate equity point of view. CBAM in its current form not only curtails the trade competitiveness of developing countries’ exports but also poses an additional financial burden for the developing countries through the imposition of such a tax on their exported products. Unless a proper redistribution mechanism is explicitly integrated with the revenue framework of CBAM, it would lead to so-called “double whammy” effects for developing countries like India.
India’s CBAM exposure and the need for a managed transition
CBAM will reshape India and EU trade dynamics. The exposure is concentrated, with iron and steel forming 76.83 per cent of India’s CBAM affected exports. Compliance costs and margin pressure will hit these sectors first. Without a managed glide path that provides time, tools, and finance, firms risk losing price competitiveness and market share even as they invest to cut emissions. Fairness and effectiveness must align. Developing countries need a phased adaptation window. The European Union should recycle CBAM revenues to fund capacity building and technology transfer. An equity-based adjustment should reflect historical responsibility, trade benefits, and development needs.
By Labanya Prakash Jena, Director, Climate and Sustainability Initiative (CSI), co-authored with Gopal K. Sarangi is Associate Professor and Head, TERI School of Advanced Studies; Shingle Sebastian is Research Scholar, DoPMS, TERI School of Advanced Studies. Views expressed are personal.
Originally published in The Pioneer.