Why in News ?
The European Union (EU) has signalled that relaxations for India on account of its (EU’s) carbon-border levy and deforestation regulation are unlikely even as India’s concern over the two is likely to come up for discussion during the upcoming meeting of Prime Minister Narendra Modi with European Commission President.
Introduction
In an era where climate change and environmental sustainability dominate global discussions, the European Union (EU) has taken significant steps to ensure that trade policies align with environmental goals. Two major regulatory frameworks—the Carbon Border Adjustment Mechanism (CBAM) and the EU Deforestation Regulation (EUDR)—aim to enforce stricter environmental norms, reduce carbon emissions, and curb deforestation worldwide.
These regulations have far-reaching implications for global trade, industries, and developing economies, particularly for countries like India, China, Brazil, Indonesia, and Russia. While the EU sees these regulations as necessary to achieve carbon neutrality by 2050, other countries argue that they impose unilateral trade barriers and create compliance burdens on exporters.
This detailed blog will provide an in-depth analysis of CBAM and EUDR, covering:
- Their objectives, implementation process, and key features
- Latest updates (2024-2025) and global reactions
- Impact on industries and countries
- Challenges and criticisms
- Future outlook and potential solutions
Carbon Border Adjustment Mechanism (CBAM)
What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM) is a carbon pricing policy introduced by the EU to ensure that imported goods are subject to the same carbon costs as domestically produced ones. It is designed to prevent carbon leakage—a phenomenon where companies move production to countries with weaker carbon regulations to avoid stringent emission rules in the EU.
Why was CBAM Introduced?
- Preventing Carbon Leakage:
- Stops companies from shifting production to countries with lax environmental rules.
- Ensuring Fair Competition:
- Levels the playing field for EU producers who must follow strict carbon pricing.
- Supporting EU’s Climate Goals:
- Helps achieve the EU Green Deal’s target of net-zero emissions by 2050.
- Encouraging Global Carbon Pricing:
- Pressures non-EU countries to introduce carbon taxation or emission reduction measures.
Key Features of CBAM
| Feature | Details |
|---|---|
| Regulated By | European Commission & EU Member States |
| Implementation Timeline | 2023 (Transitional Phase) – 2026 (Full Implementation) |
| Sectors Covered | Steel, Cement, Aluminum, Fertilizers, Electricity, Hydrogen |
| Carbon Pricing Mechanism | Importers must buy CBAM certificates based on the embedded emissions of their products |
| Reporting Obligations | Importers must disclose embedded emissions of goods entering the EU |
| Exemptions | Countries with carbon pricing equivalent to the EU ETS may receive exemptions |
| Revenue Utilization | Funds collected through CBAM will be reinvested in green technologies and climate adaptation projects |
CBAM Implementation Timeline
| Phase | Timeline | Key Requirements |
|---|---|---|
| Transitional Phase | Oct 1, 2023 – Dec 31, 2025 | Importers must report emissions, but no financial obligations yet |
| Full Implementation | From Jan 1, 2026 | Importers must buy CBAM certificates based on carbon emissions |
| Phase-out of Free EU Carbon Allowances | 2026 – 2034 | Gradual elimination of free carbon credits under EU ET |
Latest Updates on CBAM (2024-2025)
- February 2025:
- The European Commission proposed exemptions for small importers, reducing compliance burdens for businesses with imports below 50 metric tons per year.
- Simplification of reporting obligations for companies.
- January 2025:
- India and Brazil raised concerns at the WTO, calling CBAM a “disguised trade barrier.”
- India is considering introducing a domestic carbon tax to counter the effects of CBAM on Indian exports.
- December 2024:
- China and Russia officially opposed CBAM, calling it an unfair climate tariff that disproportionately affects non-EU manufacturers.
How CBAM Impacts Global Trade
Impact on Developing Countries
| Country/Region | Effect of CBAM |
|---|---|
| India | Steel and aluminum exports face higher costs, affecting competitiveness |
| China | Major exporter of cement and steel, increasing trade tensions |
| Brazil | Agricultural exports may be affected if CBAM expands to more sectors |
| Russia | Electricity and raw material exports to the EU will decline |
| USA | Businesses are lobbying for exemptions from CBAM |
EU Deforestation Regulation (EUDR)
What is the EU Deforestation Regulation (EUDR)?
The EU Deforestation Regulation (EUDR) is a policy aimed at preventing deforestation and forest degradation by ensuring that commodities imported into the EU are sourced sustainably.
Why was EUDR Introduced?
- Deforestation contributes nearly 10% of global CO₂ emissions.
- Protecting forests is crucial for biodiversity conservation.
- The EU wants to ensure that its imports do not drive illegal deforestation.
Key Features of EUDR
| Feature | Details |
|---|---|
| Regulated By | European Commission |
| Implementation Date | December 2024 |
| Commodities Covered | Palm Oil, Soy, Coffee, Cocoa, Beef, Timber, Rubber |
| Due Diligence Requirement | Companies must prove their supply chains are deforestation-free |
| Geolocation Tracking | Importers must trace commodities to their exact origin |
| Risk Classification | Countries classified as low, standard, or high risk for deforestation |
Latest Updates on EUDR (2024-2025)
- February 2025:
- EU proposed simplified reporting for SMEs to reduce compliance burdens.
- January 2025:
- The U.S. paper industry requested recognition that U.S. forests are sustainably managed.
- Malaysia and Indonesia criticized EUDR, calling it a trade restriction.
- December 2024:
- The Amazon deforestation rate dropped by 22%, partly due to EUDR reducing demand for soy linked to deforestation.
Comparison of CBAM & EUDR
| Aspect | CBAM | EUDR |
|---|---|---|
| Objective | Prevent carbon leakage through taxation | Stop deforestation-linked imports |
| Sectors Covered | Steel, cement, aluminum, fertilizers | Coffee, cocoa, soy, beef, timber |
| Implementation | 2023 (transition), 2026 (full) | 2024 |
| Compliance | Buy CBAM certificates for carbon emissions | Trace supply chains and prove deforestation-free sourcing |
| Impact on India | Higher costs for steel & aluminum exports | Coffee & rubber exports face strict compliance |
Challenges and Future Outlook
Challenges of CBAM & EUDR
- WTO Challenges:
- Developing nations argue that CBAM and EUDR are unfair trade barriers.
- High Compliance Costs:
- Small businesses struggle to meet traceability and reporting standards.
- Geopolitical Tensions:
- China, Russia, and India oppose these measures at global trade forums.
Conclusion: The Road Ahead
- CBAM and EUDR are reshaping global trade.
- Developing nations must adapt with greener supply chains.
- Trade tensions between the EU & major economies will continue.
- The success of these policies depends on international cooperation.
