Recently, the co-legislators at the European Commission signed the Carbon Border Adjustment Mechanism (CBAM).
The regulation will put a fair price on carbon emitted during the production of carbon intensive goods entering the EU and encourage cleaner industrial production in non-EU countries.
Importers will start paying the financial levy from 2026.
About: Carbon Border Adjustment Mechanism (CBAM)
The European Green Deal is a plan to reduce carbon emissions by 55% by 2030 and become a climate neutral continent by 2050.
It aims to avert 'carbon leakage', where EU manufacturers move carbon-intensive production to countries outside the region with less stringent climate policies.
Importers in the EU would have to buy carbon certificates corresponding to the payable carbon price of the import had the product been produced in the continent.
The Commission would be responsible for reviewing and verifying declarations and managing the central platform for the sale of CBAM certificates.
Importers would have to annually declare the quantity andembedded emissions in the goods imported into the region in the preceding year.
The CBAM would be introduced in parallel with the phasing out of the allocation of free allowances given out under the EU Emissions Trading System (ETS).
The ETS had set a cap on the amount of greenhouse gas emissions that can be released from industrial installations in certain sectors, but some allowances were given out for free to prevent carbon leakage.
The EU concluded that this dampened the incentive to invest in greener production, so an import-based tariff was proposed.
Why are countries worried?
CBAM would initially apply to imports of certain goods and precursors whose production is carbon-intensive and at risk of 'leakage'.
Eventually, it would capture more than half of the emissions in ETS covered sectors.
India, Brazil and South Africa would be most affected, while Mozambique would be the least-developing country.
India's exports in the five segments represented less than 2% of the total exports to the EU between 2019 and 2021, but its long-term effectscan be severe due to the EU being India's third largest trade partner and its projected growth trajectories.
The two sides have agreed to intensify their engagement on carbon border measures.