Dealing with economic liability of CBAM and India's preparedness

As the road unwinds towards Belem for COP 30, contentious issues of carbon emission dominate the global discourse. Countries across the globe have been taking a series of steps to decarbonise their industries by adopting market-based approaches by pricing their carbon emission as well as recycling the revenue thus generated to fulfil their mitigation and adaptation  finance needs.

 

These carbon pricing mechanisms, however, allegedly may give rise to ‘carbon leakage’, when  applied unilaterally by countries. This underpins the emergence of contentious Carbon Border  Adjustment Mechanism (CBAM) by EU and UK, rationalised as a means to curb carbon  leakage and protect their domestic industries from competitiveness disadvantage due to carbon  pricing of their emissions.

 

However, CBAM is fraught with limitations in controlling carbon  leakage due to resource reshuffling, insufficient coverage of products owing to complex value  chains and impacts on downstream products etc. The EU is already confronting multiple  implementational issues due to lack of awareness and reporting uncertainty among its  importers, difficulties in obtaining information from suppliers due to rudimentary nature or  absence of monitoring, regulatory and verification (MRV) framework in most exporting  jurisdictions. The EU has initiated a massive stakeholders consultation drive in August 2025 by  inviting feedback/suggestions to overcome its mounting challenges in CBAM implementation.

 

CBAM has been designed to allow credit for only explicit carbon prices paid by exporters in  exporting countries, however, most such countries follow non-pricing (like voluntary carbon offsetting, deforestation etc) and implicit pricing measures (Fuel taxes etc) for decarbonisation.  It excludes implicit taxes like India’s fuel tax from consideration when providing CBAM  discounts. Non recognition of such non-carbon pricing measures is an unjustified discrimination under GATT (WTO) provisions and disregard to the country's non-market based efforts. CBAM must be reconsidered to incorporate some standards for crediting non-pricing  measures. Guidance on various carbon pricing metrics that include both explicit and implicit  pricing have been published combinedly by multilateral bodies (WTO, World Bank, OECD,  IMF) to infer effective Carbon Price in a country.  

 

Another key issue is variations in Carbon intensity metrics, measurement of emissions per unit  of production, where ensuring comparability across nations and facilities is difficult due to  differing methodologies and reporting systems. As most developing countries including India  lack a standardised MRV regime, it becomes challenging to ensure internationally acceptable reporting.

 

In recognition to the amplified implications of this issue, OECD has recently released a report on interoperability of different MRV systems in terms of their coverage, emission  estimation approaches, data availability and reporting frameworks, which may be a guide for  addressing impending disputes.

 

CBAM contravenes key tenets of international law (UNFCCC and WTO). CBAM poses a  competitive disadvantage to the low-income countries by shifting the burden of  decarbonization towards them. Article 3.5 of UNFCCC explicitly prohibits any unilateral  measures taken for climate change that constitutes a disguised restriction to international trade.

 

Article 4(3) of UNFCCC along with Article 9 of Paris agreement and Article 66 of TRIPS, WTO,  expressly obligates developed countries to take proactive efforts towards creating access and  financing dissemination of technology to developing countries, which CBAM fails to abide by. Imposition of CBAM must be viewed as a strategic opportunity by the developed world to institutionalise the process of technology transfer and financial assistance to developing  countries by embedding these elements within the framework of the mechanism.

 

India’s response: Carbon pricing and voluntary carbon market

 

India’s exports, estimated at about 0.2 per cent of GDP, are likely to be adversely affected by CBAM  obligations. As a major exporter of CBAM-covered products worth roughly $8.5 billion,  India’s exposure is concentrated in the iron and steel sectors, which accounts for nearly 90 per cent of  the total. With more countries increasingly adopting CBAM, the impact will multiply  enormously.

 

To brace against these exigencies and to adopt a steady path towards decarbonisation, India is fast progressing towards a structured and regulated carbon pricing framework and actively  designing a rate-based Emissions Trading System (ETS) along with complementary voluntary  carbon crediting mechanisms. With the introduction of the Carbon Credit Trading Scheme (CCTS) in July 2024, India is advancing towards a rate-based ETS that will initially encompass  nine energy-intensive industrial sectors.  

 

The scheme comprises two key components which are a compliance mechanism for obligated  entities, mainly from industrial sectors, and an offset mechanism to encourage voluntary  participation. Under the offset mechanism, non-obligated entities may register projects aimed  at reducing, removing, or avoiding GHG emissions. The necessary institutional framework has  thus been laid for the development of an Indian Carbon Market (ICM).

 

In March 2025, India’s  Ministry of Power approved 8 crediting methodologies for generating voluntary carbon credits  such as Renewable Energy, Green Hydrogen, Mangrove Afforestation etc. The government  issued carbon credit certificates can be traded over an electronic trading platform. The EU has been  reported to soon integrate India’s CCTS in its CBAM framework, which will be a relief for  Indian exporters investing in decarbonisation, while it will also address long-standing concerns  of carbon double taxation.

 

The foundation of the Indian Carbon Market is a remarkable step towards embracing fundamental  pillars of a carbon dictated future economy. Defining carbon credits as an asset class will help  in boosting investor confidence and attracting capital to carbon markets. Being in a nascent  stage of development, however, ICM has to travel some distance to be integrated with the  international market to reap proper benefits of an effective carbon pricing which will help in  combating the CBAM implications. Besides this, a robust MRV framework aligned with  international standards will prevent future litigations on carbon intensity declarations and  CBAM liability computations.

 

As the world descends together for COP 30, hailed as an implementational COP, the fractured  dialogues between developed and developing halves must find an urgent sync over pressing  issues to find harmonious solutions to challenges of border carbon adjustment. There must be  a consistent and honest strategy towards channelising CBAM revenue towards financial  assistance as well as trade policy linked transfer of technology to the developing world. Without  these obligations being binding and woven within the CBAM scheme, any market mechanism to decarbonise will be inadequate to catch up with the rate of climate change.  

 

We sail or drown together in the climate induced deluge of calamities- choice is ours, time to  act is now!

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The writer is commissioner, income tax, with specialisation in environmental taxation and climate finance