April 22, 2024
What is CBAM's impact on Indian exports?

As a leader of an Indian export company, you're well aware of the ever-evolving global trade landscape. The European Union's (EU) Carbon Border Adjustment Mechanism (CBAM), implemented as part of the European Green Deal, introduces a new layer of complexity for Indian exporters. Understanding CBAM's impact and taking proactive measures are crucial to navigate this changing environment.

What is CBAM?

CBAM is essentially a carbon pricing mechanism designed to level the playing field for EU producers and address the issue of carbon leakage.  When carbon-intensive goods are produced in countries with less stringent environmental regulations, it can incentivise businesses to relocate production to those regions – a phenomenon known as carbon leakage. CBAM aims to counter this by placing a carbon cost on specific imported goods into the EU market.

What does CBAM mean for Indian exporters?

India is a major exporter to the EU, with steel, aluminium, cement, and fertilisers being some of the key sectors. These sectors also happen to be carbon-intensive, making them prime targets for CBAM. Here's what Indian exporters can expect:

  • Increased Production Costs: CBAM essentially acts as a carbon tax on imported goods. Exporters will be responsible for calculating and reporting the embedded carbon emissions associated with their products. This will translate into higher production costs, impacting profit margins.
  • Reduced Competitiveness: EU-produced goods that have a lower carbon footprint will become relatively cheaper. Indian exporters might face pressure to lower prices to remain competitive, further impacting profitability.
  • Shifting Market Dynamics: CBAM could incentivise EU buyers to source products from regions with stricter environmental regulations. Indian exporters may need to find ways to demonstrate the environmental footprint of their products.

Which Sectors Will Be Impacted?

The initial phase of CBAM focuses on specific sectors with a high carbon footprint. Here's a breakdown of the sectors most likely to be impacted:

  • Iron and Steel: The steel industry is a major source of carbon emissions, making it a prime target for CBAM. Indian steel exporters will need to demonstrate the efficiency of their production processes to minimise the impact.
  • Aluminium: Aluminium production is another energy-intensive process. Indian aluminium exporters will need to invest in cleaner technologies and source low-carbon raw materials to stay competitive.
  • Cement: The cement industry is a significant contributor to greenhouse gas emissions. Indian cement manufacturers will need to explore ways to reduce their carbon footprint through innovative production techniques and the use of alternative fuels.
  • Fertilisers: While CBAM initially focuses on indirect emissions for fertilisers, the long-term plan is to encompass all emissions. Indian fertiliser companies will need to optimise their production processes and explore greener alternatives.
  • Electricity: The electricity sector is also on the radar for CBAM, with a focus on the carbon intensity of electricity generation. Indian companies exporting electricity to the EU will need to demonstrate a shift towards renewable energy sources.
  • It's important to note that CBAM's scope is expected to expand in the future to encompass other sectors with a high carbon footprint.

What is expected in the transitional and execution phase?

CBAM is being implemented in a phased approach:

  • Transitional Phase (2023-2025): This is a data collection period. Exporters will be required to submit information on the embedded carbon emissions in their products. While there's no direct financial implication yet, this phase is crucial for gathering data and establishing compliance procedures.
  • Execution Phase (2026 onwards): This is when the actual carbon pricing comes into effect. Exporters will need to purchase CBAM certificates to cover the embedded carbon emissions in their products. The cost of these certificates will be directly linked to the carbon footprint of the goods.

Best Practices for CBAM Compliance

Proactive planning and implementing best practices can help Indian exporters mitigate the impact of CBAM. Here are some key steps to consider:

  • Invest in GHG Data Management: Accurate and transparent data on embedded carbon emissions is crucial for CBAM compliance. Implementing a robust Greenhouse Gas (GHG) data management product such as Oren’s award winning platform Oren Sustainability Hub is the most efficient way to track emissions in real-time. These tools can capture data across the entire supply chain, from raw material extraction to finished product delivery.
  • Embrace Transparency: Building transparency and trust with EU buyers is essential. Consider third-party verification of your sustainability data to demonstrate the legitimacy of your carbon footprint calculations.
  • Explore Carbon Reduction Strategies: Reducing your carbon footprint is not just about compliance; it's also a long-term sustainability strategy.

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