Embedding Climate Policies in Trade Regulations

October 2023 marks the beginning of the transitional phase of the Carbon Border Adjustment Mechanism (CBAM) adopted by the European Union (EU). It gains significance as it is the first major initiative that firmly embeds climate policies in international trade regulations in a major way. Under this mechanism, importers of goods into the EU will have to purchase certificates, as in the case of emissions trading systems, to compensate for the carbon generated in their production process. The CBAM is expected to help the European Commission in meeting its stated goal of achieving climate neutrality by 2050, way ahead of India’s target of 2070.

The EU points out that the CBAM, which claims to be compliant with the World Trade Organization rules, is critical to help minimise carbon leakages and reduce emissions worldwide. Carbon leakages can happen when the stringent emission norms of the EU motivate producers to relocate production to non-EU countries that have lower emission constraints and often more carbon emitting production processes. Consequently, the reduction in emissions in the EU can contribute to an overall increase in global carbon emissions. Moreover, the CBAM will also ensure a level playing field for the EU industries as importers of goods into the EU would have to compensate for the carbon emissions generated during the production of these goods. It is also argued that the CBAM will also help EU influence the climate policies of its trading partners who would be forced to contain carbon emissions of their exports.