CBAM: Let's get ready

Sustained government support has to be given to MSMEs for them to achieve compliance with the UK and EU Carbon Border Adjustment Mechanism systems

In a little over 60 days, the Carbon Border Adjustment Mechanism (CBAM) will be fully operational in both the United Kingdom (UK) and the European Union (EU). The CBAM is essentially aimed at bringing manufacturers/ exporters from non-UK/ EU countries on par with domestic producers in terms of carbon-price payment in these two economies, within the larger context of their green transition objectives.  This is particularly relevant for India, as the EU and the UK offer preferential market access through free trade agreements (FTAs) to our exporters in over 95 per cent tariff lines. The UK FTA is already in force, while the EU FTA is expected to be signed by the end of this year and become effective in 2027.

 

The UK CBAM covers five sectors — aluminum, cement, fertiliser, hydrogen, iron and steel. Unlike the EU, which had a year-long transition period during which only reporting obligations applied, the UK CBAM will enter the operational phase from January 1, 2027. The liability of the carbon-tax falls on the importer in the specified product categories above a certain value-based threshold level. Earlier this year, the UK accepted India’s Carbon Credit Trading System (CCTS) under its CBAM regulations, 2026. Consequently, the UK importer becomes eligible for carbon-price offset and the Indian exporter gets the benefit though price negotiation with the importer. However, to qualify for the offset, the importer has to fulfil the verification and paperwork requirements for the embodied emissions in the imported good. The accuracy and authenticity of the monitoring and measurement of embodied emissions, reporting, verification, and the actual costs incurred by the producer/exporter are crucial to availing of the benefits of the CCTS in the UK. Only a full member of the Global Accreditation Cooperation Incorporated is authorised to undertake and complete the data verification. If data on emissions is not available, default values will be used, which, being conservative estimates, will imply higher CBAM charges. 

 

Many of India’s micro, small, and medium enterprises (MSMEs) may not have the necessary ability or resources to monitor and record embodied emissions and to sufficiently satisfy the requirement for hard and systematic evidence required by the UK authorities. Furthermore, India’s CCTS is nascent and will take time to develop. Therefore, the CCTS recognition by the UK may, at present, imply only a small discount for Indian exporters. To increase the depth of the carbon-credit market and strengthen the Indian exporters’ position in the UK market, the government needs to widen the sectoral coverage of CCTS and set more ambitious emission benchmarks for industry over a pre-defined timeline.

 

The EU CBAM is at present applicable to six sectors with electricity, in addition to the five in the case of the UK. However, a further expansion of the scope of the CBAM to cover over 180 downstream aluminium- and steel-intensive products is on the anvil. Also, whereas the UK uses emission intensity as the parameter for tax imposition, the EU CBAM is based on actual emissions data, direct and indirect, at a highly granular level along the supply chain.  In the UK, indirect emissions reporting has been postponed to 2029, at the earliest. Detailed mapping of the production value chain and corresponding emissions is therefore important, as reference default values will be specified by the EU Commission accordingly.

 

The data on emissions has to be verified by independent verifiers accredited by EU accreditation bodies. Accredited verifiers can start issuing verified reports on actual emissions in 2026 through the EU CBAM Registry from January 1, 2027. This will help finalise the actual verified emissions data for producers/ exporters rather than the use of default values. Purchase of certificates will begin from February 2027. The submission of the first annual CBAM declaration and surrender of corresponding certificates has to be done by September 2027. The CBAM tariff offset calculation will be based on accurate and valid carbon reduction certificates from the exporter’s home country. The year 2027 is, therefore, critical for CBAM implementation and for exporting countries to be compliance-ready.

 

Given that strict scrutiny and adherence to the norms under CBAM regulations are to be expected in both the EU and the UK, Indian exporters, especially small and medium-sized enterprises, will need government support to make the most of our FTAs with these two economies. Towards this end, the following measures may be useful.

 

Firstly, the government or the industry chambers need to undertake a product code matching exercise separately with the UK and the EU CBAM’s current and potential product lists. This will help manufacturers/exporters gain clarity on the extent of their tax liability under CBAM, as granular-level product specifications may not correspond across countries.

 

Secondly, detailed mapping of carbon emissions along the entire production value chain may be beyond MSMEs in India. Even most medium enterprises may not yet have the necessary metering or accounting systems to track carbon emissions for upstream or downstream value chains.

 

The Securities and Exchange Board of India’s expansion of the Scope 3 level (indirect/value-chain carbon emissions) reporting requirement to the top 1,000 listed companies from financial year 2026-27 is a step in the right direction. However, as it is a voluntary requirement, it may not necessarily prepare Indian producers/ exporters for the mandatory data obligations under the EU CBAM. In fact, for MSMEs, even scope 1 and 2 emissions reporting is voluntary. This makes getting carbon emissions data along the value chain difficult, even for large listed companies. It will, therefore, be useful if budgetary support is specifically delineated for CBAM infrastructure schemes, besides incentives and initiatives to encourage greener production methods. In addition, bilateral discussions at the Trade and Technology Council meetings with the EU should include negotiations on technology sharing and financial support, in line with India’s demands in international climate negotiations.

 

Thirdly, a complete match between the Indian carbon-emission accounting framework and the respective UK and EU systems will need to be established. This should be taken up either by the government or at the level of industry chambers and exporter associations. The MSMEs also need to be sufficiently familiarised with the respective emission accounting frameworks and methodologies, and suitably trained to provide accurate data in both CBAM formats. 

 

Therefore, recognising that the strict implementation of CBAM is a fast-approaching inevitability in the UK and the EU, making Indian exporters compliance-ready is an immediate necessity.

 

 

The writer is professor, School of International Studies, JNU, and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal