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Rethinking CBAM: Keeping India’s Carbon Revenues
Keeping India’s Carbon Revenues at Home: Rethinking CBAM through IBAM
Syllabus:
• GS – 3 – Carbon Tax , Sustainable Development
Focus :
The article examines the implications of the EU’s Carbon Border Adjustment Mechanism (CBAM) on India, highlighting concerns of climate justice, trade fairness, and sovereignty. It argues for leveraging India’s Carbon Credit Trading Scheme (CCTS) and proposes an India Border Adjustment Mechanism (IBAM) to retain carbon revenues domestically while ensuring alignment with global climate commitments and environmental jurisprudence.
Introduction: Understanding CBAM
• The Carbon Border Adjustment Mechanism (CBAM) came into effect on January 1, 2026.
• The European Union justifies CBAM as a mechanism to ensure that imported goods bear the same carbon cost as domestic goods, aligning with the polluter pays principle.
• The objective is to prevent “carbon leakage,” where industries shift to countries with weaker climate regulations and environmental clearances.
• However, in practice, CBAM creates challenges for developing countries like India, raising questions about environmental democracy and fair burden-sharing.
Unequal Playing Field under CBAM
1.Advantages enjoyed by European producers
• European industries receive significant decarbonisation subsidies from their governments.
• They also benefit from subsidised public finance for green transitions.
• Under the EU Emissions Trading System, European firms continue to receive free emission allowances.
• These free allowances will be phased out gradually between 2026 and 2034.
• As a result, the effective carbon cost borne by European producers remains lower during the transition period.
2.Disadvantages faced by Indian exporters
• Indian exporters are required to pay the full CBAM charges without any comparable domestic support.
• There are limited subsidies or financial mechanisms in India to offset these costs.
• This creates an uneven playing field in international trade, despite India’s robust environmental clearance frameworks.
3. Conflict with Global Trade Principles
• CBAM raises concerns under the General Agreement on Tariffs and Trade.
• Article III prohibits the use of internal taxes and regulations to protect domestic industries.
• CBAM may act as a disguised protectionist measure by favouring European industries, contradicting the precautionary principle of fair climate action.
• Therefore, it challenges the principle of fair and non-discriminatory trade.
India-EU Free Trade Agreement: Limited Gains
1.Absence of exemption
• The India-EU Free Trade Agreement does not grant India any exemption from CBAM.
• The European Union has maintained that no country will receive special treatment.
2.Importance of Annex 14-A
• Annex 14-A establishes a formal mechanism for technical dialogue on CBAM implementation.
• It allows discussions on recognising carbon pricing mechanisms in partner countries.
• It includes a most-favoured-nation clause, ensuring that any flexibility given to other countries will also apply to India.
• This provision offers India an important negotiating opportunity within the framework of environmental jurisprudence.
Core Issue: Climate Justice and Sovereignty
• CBAM effectively shifts part of the decarbonisation burden from developed to developing countries.
• While developing countries bear the cost, the revenue generated is retained by the European Union.
• This creates concerns regarding climate justice and the polluter pays principle.
• It also limits India’s sovereignty in determining its own carbon pricing and climate policies.
• India risks becoming a “rule-taker” rather than a “rule-maker” in global climate governance and environmental democracy.
India’s Domestic Framework: Carbon Credit Trading Scheme
• India introduced the Carbon Credit Trading Scheme (CCTS) in 2023, complementing existing frameworks like the Forest Conservation Act and EIA notification.
• The scheme establishes a domestic carbon market based on tradable carbon credits.
• Industries are required to hold credits corresponding to their emissions, similar to environmental clearances for project approvals.
• The scheme will gradually cover key sectors such as steel, cement, and energy.
• It creates a domestic carbon price expressed in rupees per tonne of emissions, reinforcing the polluter pays principle.
Legal Opportunity under CBAM Article 9
• CBAM provides a mechanism under Article 9 to account for carbon prices already paid in the country of origin.
• This allows importing countries to deduct the carbon price paid domestically from CBAM charges.
• India can use this provision to seek recognition of CCTS as a valid carbon pricing mechanism.
• This would prevent double taxation of Indian exporters.
• However, this requires strong monitoring, reporting, and verification systems, including environmental impact assessment protocols.
• It also requires transparency and assurance that no export rebates neutralise the carbon cost, avoiding issues similar to ex post facto environmental clearances.
Proposal for India: India Border Adjustment Mechanism (IBAM)
• India can introduce an India Border Adjustment Mechanism (IBAM) as a countermeasure grounded in environmental jurisprudence.
• IBAM would impose a carbon-based charge on exports at the point of origin in India.
• This charge would mirror the CBAM cost but would be collected domestically.
• IBAM should not be implemented unilaterally.
• It must be developed through consultation under Annex 14-A of the FTA.
• This will ensure that IBAM is recognised under CBAM rules as a legitimate carbon price, consistent with the precautionary principle.
Benefits of IBAM Strategy
1.Avoidance of additional burden
• Indian exporters will not face any higher net carbon cost than what CBAM imposes.
• The total burden remains capped at the CBAM level.
2.Retention of carbon revenues
• Carbon revenues will remain within India instead of flowing to the European Union.
• This strengthens domestic financial resources for climate action and environmental democracy.
3.Enhancement of strategic autonomy
• India gains greater control over its carbon pricing policies.
• It strengthens its position as an active participant in global climate governance.
Utilisation of IBAM Revenues
• Revenues generated from IBAM should be placed in a dedicated and transparent fund.
• The fund should be strictly used for green and sustainable projects promoting a pollution free environment.
Priority areas for investment
• Modernisation of carbon-intensive industries such as steel production, ensuring compliance with environmental clearances.
• Expansion of renewable and low-carbon electricity generation.
• Promotion of green hydrogen and circular economy practices such as scrap-based steelmaking.
• Support for workers affected by industrial transitions.
• Strengthening environmental impact assessment frameworks and coastal regulation zone protections.
Governance principles
• The fund should follow strict monitoring, reporting, and verification standards aligned with EIA notification requirements.
• It should be independently audited, avoiding retrospective environmental clearances or ex-post compliance issues.
• Full public transparency should be ensured, upholding environmental democracy principles established in landmark cases like the Vanashakti judgment.
IBAM as a Constructive Global Approach
• IBAM should be presented as a cooperative and constructive policy rather than a retaliatory measure.
• If the European Union recognises IBAM, it will ensure that carbon pricing objectives are achieved without double taxation.
• European consumers will continue to receive carbon-compliant products.
• Indian producers will face a fair and predictable cost structure based on the polluter pays principle.
Conclusion: A Strategic Way Forward
• India must effectively use provisions under Annex 14-A and CBAM Article 9.
• It should integrate domestic carbon pricing with international mechanisms, building on existing frameworks like the Forest Conservation Act and environmental clearance systems.
• The strategy of “IBAM the CBAM” will help India retain its carbon revenues.
• It will also ensure fair trade, protect sovereignty, and support India’s green transition toward a pollution free environment.
• Ultimately, India must move from being a rule-taker to becoming a rule-maker in global climate governance, strengthening environmental democracy and environmental jurisprudence.
Mains UPSC Question
GS 3
• “The EU’s Carbon Border Adjustment Mechanism (CBAM) raises concerns of trade fairness and climate justice for developing countries.” Examine. Suggest how India can respond strategically through domestic policy instruments like IBAM while upholding the polluter pays principle and precautionary principle. (250 words)
