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Home / UPSC / Current affairs / Carbon Border Adjustment Mechanism (CBAM)

Carbon Border Adujustment Mechanism (CABM)

The Carbon Border Adjustment Mechanism (CBAM) is the European Union’s landmark tool to put a fair price on the carbon emitted during the production of carbon-intensive goods entering the EU. It is a key part of the “Fit for 55” package, which aims to reduce net greenhouse gas emissions by at least 55% by 2030.

Core Objectives:

    • Preventing Carbon Leakage: Ensuring that EU’s climate efforts are not undermined by production moving to countries with less ambitious climate policies.
    • Equalizing Carbon Costs: It levels the playing field between EU products (which pay a carbon price under the EU Emissions Trading System – ETS) and imported goods.
    • Global Incentivization: Encouraging non-EU industries to adopt greener technologies to avoid the levy.

Implementation Timeline:

    • Transitional Phase (Oct 1, 2023 – Dec 31, 2025): Importers only need to report the embedded emissions of their goods without paying a financial adjustment.
    • Definitive Phase (Starts Jan 1, 2026): Importers must purchase CBAM certificates corresponding to the carbon price that would have been paid if the goods were produced under EU carbon pricing rules.

Impact on India

The EU is India’s third-largest trading partner. CBAM is expected to act as a significant non-tariff barrier, particularly affecting India’s heavy industries.

1. Sectoral Vulnerability

India’s exports in seven sectors are initially covered: Iron, Steel, Aluminum, Cement, Fertilizers, Hydrogen, and Electricity.

    • Steel & Aluminum: These are the hardest hit. Approximately 27% of India’s exports of iron, steel, and aluminum go to the EU.
    • Cost Escalation: Estimates suggest an additional burden of 20-35% on Indian taxable goods.

2. Competitive Disadvantage

Indian production is generally more carbon-intensive than the global average. For example, Indian steel often uses coal-based blast furnaces, making it more expensive under CBAM compared to European steel produced with recycled scrap or green hydrogen.

3. SMEs and Compliance

Small and medium-sized enterprises (SMEs) in the supply chain may struggle with the complex reporting and verification requirements, leading to potential exclusion from the European market.

How India is Working Around It

The Government of India and industry bodies are using a two-pronged approach: Diplomatic Negotiation and Domestic Adaptation.

1. Diplomatic & Legal Challenges

    • WTO Dispute: India has raised concerns at the World Trade Organization (WTO), arguing that CBAM is discriminatory and violates “Common but Differentiated Responsibilities” (CBDR) under the Paris Agreement.
    • G7/G20 Advocacy: India is seeking a “Climate Club” or a multilateral solution that recognizes different paths to decarbonization.

2. Green Transition of Industry

    • Green Hydrogen Mission: Aiming to make India a global hub for green hydrogen to replace coal in steel and fertilizer production.
    • Perform, Achieve and Trade (PAT) Scheme: Mandating energy efficiency targets for energy-intensive sectors.

3. Proposing a “Carbon Tax” Mutual Recognition

India is negotiating with the EU to recognize India’s domestic carbon taxes and renewable energy investments so that Indian exporters are not “double-taxed.”

Something Similar in India? (The CCTS)

Yes, India is developing its own mechanism called the Carbon Credit Trading Scheme (CCTS), which will eventually form the Indian Carbon Market (ICM).

Complete Details of the Indian Carbon Market (ICM):

Launched under the Energy Conservation (Amendment) Act, 2022, the ICM is designed to incentivize greenhouse gas (GHG) emission reductions.

Feature

Details

Nodal Agency

Bureau of Energy Efficiency (BEE) under the Ministry of Power.

Regulatory Body

Central Electricity Regulatory Commission (CERC).

Mechanism

A Cap-and-Trade system. The government sets emission targets; those who over-achieve get “Carbon Credit Certificates” (CCC) which can be sold to those who fail to meet targets.

Sectors

Initially targeting high-emission sectors like Cement, Steel, and Chemicals (similar to EU CBAM).

Comparison: India's CCTS vs. EU CBAM

While CCTS is an internal trading system to reduce domestic emissions, it provides a crucial legal basis for India. If India has a domestic carbon price through CCTS, the EU may be legally obligated to deduct that price from the CBAM levy under WTO rules.

Latest News (2025-2026 Context)

    • Verification Standards: In early 2026, the BEE finalized the “Monitoring, Reporting, and Verification” (MRV) protocols to ensure Indian carbon credits meet international standards.
    • Green Steel Initiatives: Major Indian steel players like Tata Steel and JSW have accelerated their transition to Gas-based and Electric Arc Furnaces (EAF) to stay competitive in the EU market by 2026.

What Is India’s CCTS (Carbon Credit Trading Scheme)?

The Carbon Credit Trading Scheme (CCTS) is India’s domestic carbon market framework designed to incentivize greenhouse gas (GHG) emissions reduction and create a tradable carbon credit economy across industrial sectors. It was notified in 2023 under the Energy Conservation (Amendment) Act, 2022, giving legal backing to carbon trading in India.

Core Objectives:

CCTS aims to embed carbon pricing into India’s industrial operations by:

    • Setting emission intensity targets for energy-intensive sectors.
    • Issuing Carbon Credit Certificates (CCCs) to entities that outperform targets.
    • Allowing entities that miss targets to purchase credits or face penalties.

This moves India beyond voluntary offset mechanisms to a legally enforceable compliance market supporting its climate commitments (including the Paris Agreement and Net-Zero by 2070 goal).

How CCTS Works — Key Mechanisms

1. Emission Intensity (GEI) Targets

Instead of absolute emission caps, CCTS uses Greenhouse Gas Emission Intensity (GEI) targets — defined as GHG emissions per unit of product output.
 Targets are sector-specific and legally binding across compliance periods (e.g., FY 2025–26 and 2026–27).

Example Sectors Covered:

    • Aluminium
    • Cement
    • Chlor-alkali
    • Pulp & Paper
    • Iron & Steel
    • Petroleum Refining
    • Petrochemicals
    • Textiles
    • Secondary Aluminium

These initial targets cover ~700+ industrial installations and ~700 million tonnes CO₂e — making CCTS one of the largest emission trading systems globally by volume.

2. Compliance Mechanism

    • Obligated Entities: Industries that must meet GEI targets.
    • Entities that emit less than their target generate Carbon Credit Certificates (CCCs) — tradable assets.
    • Entities that fail to meet targets can:
        • Buy CCCs from others, or
        • Pay environmental compensation (penalties tied to carbon price).

The penalty structure aims to ensure market discipline and a meaningful price signal.

3. Voluntary Offset Mechanism

Alongside compliance:

      • Entities not covered by GEI targets can register GHG reduction projects (e.g., renewable energy, green hydrogen, methane recovery).
      • Upon verification, they receive CCCs to sell in the market.

This expands participation and improves liquidity in the carbon market beyond mandatory sectors.

Legal & Institutional Framework

CCTS operates within a multi-agency structure:

Authority

Role

Ministry of Environment, Forest and Climate Change (MoEFCC)

Sets targets & climate policy

Ministry of Power (MoP)

Recommends GEI targets

Bureau of Energy Efficiency (BEE)

Administrator: issues CCCs, sets standards

Grid Controller of India (GCI)

Manages carbon registry

Central Electricity Regulatory Commission (CERC)

Regulates trading & market integrity

National Steering Committee on Indian Carbon Market

Policy oversight & coordination

This structure aims to ensure transparent governance and robust market operations ahead of full rollout.

Latest Developments & Timeline (2025–2026)

1. Notifications & Targets

    • Final GEI targets for first sectors were notified on 8 October 2025, covering aluminium, cement, chlor-alkali and pulp & paper.
    • Second notification (Jan 2026) brought petroleum refineries, petrochemicals, textiles and secondary aluminium under compliance.

2. Market Launch

    • Official trading infrastructure (registries and exchanges) is being prepared.
    • CCTS trading and compliance obligations are expected to begin in 2026.

3. Current Status of Credits

As of late 2024, no carbon credits had yet been generated under CCTS; procedures for compliance/offset issuance are being finalized.

Why CCTS Matters for India

1. Climate Impact

    • CCTS directly targets emissions, unlike older efficiency-based schemes.
    • It supports India’s NDCs under the Paris Agreement and net-zero by 2070 vision.

2. Industrial Transformation

    • Companies adopting low-carbon technologies (e.g., renewables, green hydrogen) can earn and sell CCCs.
    • Entities lagging behind must pay or invest in clean tech — internalizing carbon costs.

3. Economic & Competitive Effects

    • Early decarbonizers may gain competitive advantage and access to carbon markets.
    • With global tools like the EU’s Carbon Border Adjustment Mechanism (CBAM) impacting trade, CCTS provides a domestic platform for credible emission accounting.

Key Challenges & Critiques

While promising, analysts point to current shortcomings:

    • Modest early targets may temper emissions impact initially.
    • Governance, measurement, reporting, verification (MRV) systems need robust scaling to avoid market manipulation or leakage.

Sector coverage expands over time; full decarbonization will require inclusion of more industries.

Summary: India’s CCTS at a Glance

Feature

Description

Full Name

Carbon Credit Trading Scheme (CCTS)

Legal Basis

Energy Conservation (Amendment) Act, 2022; EPA 1986

Mechanism

Emission intensity targets + tradeable carbon credits

Compliance Start

Expected 2026

Market Coverage

Initially 9 energy-intensive sectors

Market Components

Compliance + voluntary offset

Administered by

BEE with multi-agency oversight

Role

Align India’s industry with climate targets and carbon pricing

GS Foundation Course
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