BRICS Challenges EU’s Carbon Border Adjustment Mechanism (CBAM)

Context: The 12th BRICS Environment Ministers’ Meeting held in New Delhi under India’s chairship adopted a joint ministerial statement condemning the European Union’s Carbon Border Adjustment Mechanism (CBAM) as a unilateral, punitive, discriminatory, and protectionist trade barrier.

About BRICS Challenges EU’s Carbon Border Adjustment Mechanism (CBAM):

What it is?

• The Carbon Border Adjustment Mechanism (CBAM) is the European Union’s landmark climate-trade policy instrument designed to put a carbon price on imports of carbon-intensive goods entering the EU.
• Having entered its definitive financial phase on January 1, 2026 (following a transitional reporting phase from 2023 to 2025), it aims to equalize the price of carbon paid by domestic EU manufacturers under the EU Emissions Trading System (EU ETS) with that paid on imported goods.

How the EU Carbon Taxation Works?

• Targeted Industrial Sectors: Applies to six carbon-intensive, trade-exposed sectors: iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity.
• Calculation of Embedded Emissions: Importers must quantify and report verified direct emissions (Scope 1) from manufacturing and indirect emissions (Scope 2) from electricity consumed during production.
• Purchase and Surrender of CBAM Certificates: Importers must purchase CBAM certificates priced according to the weekly average auction prices of the EU ETS to cover the embedded carbon in their consignments.
• Domestic Carbon Price Deduction: If the exporting entity has already paid an explicit carbon tax or carbon price in its country of origin, that amount is deducted from its final EU CBAM liability.

Need for the EU Carbon Tax:

• Preventing Carbon Leakage: Discourages EU companies from moving carbon-heavy production to countries with weaker environmental regulations to evade EU carbon costs.

Example: Preventing European steelmakers from relocating blast furnaces outside the EU.

• Leveling the Playing Field for Domestic Industry: Ensures EU manufacturers—who pay rising compliance costs as free EU ETS allowances are phased out—are not undercut by cheaper, high-emission imports.
• Incentivizing Global Decarbonization: Uses European market access as leverage to compel international trade partners to adopt cleaner industrial technologies. Example: Encouraging third-country smelters to switch to green hydrogen or renewable power.
• Closing Climate Policy Asymmetry: Harmonizes the carbon footprint of imported goods with the EU’s legally binding target under the European Green Deal to cut net emissions by 55% by 2030.
• Mobilizing Clean Transition Revenues: Channels certificate sales revenue into EU climate funds and technological innovation budgets for clean manufacturing.

Implications of the EU Carbon Tax on BRICS Members

• Severe Exposure in Key Export Sectors: BRICS exporters face heavy financial tariffs on primary industrial exports.

Example: Iron and steel constitute ~90% of India’s total CBAM-exposed exports to the EU, with emissions intensity averaging 2.5 tons of CO2 per ton of steel compared to the EU’s 1.8 benchmark.

• Disproportionate Burden on Developing Economies: Heavy reliance on coal-based power grids in China, India, and South Africa inflates Scope 2 indirect emissions, translating to an estimated ad-valorem equivalent tariff burden of 15%–20% on steel and 30%–40% on aluminium.
• Violation of Common But Differentiated Responsibilities (CBDR): BRICS nations argue that CBAM undermines the UN Framework Convention on Climate Change (UNFCCC) and Paris Agreement principles by penalizing developing nations that have lower historical cumulative emissions.
• Market Access Barrier for MSMEs: High costs of third-party emissions verification, carbon accounting, and data reporting disproportionately lock small-scale foundries and component suppliers out of European supply chains.
• Trade Divergence & Supply-Chain Segregation: Forces companies to create bifurcated production lines—diverting low-carbon green products to Europe while dumping high-carbon output in domestic or non-EU emerging markets.

Way Ahead:

• Mounting Coordinated WTO Legal Challenges: Challenge the unilateral nature of CBAM at the World Trade Organization, arguing that pairing border adjustments with residual domestic subsidies constitutes disguised protectionism under GATT Articles I, III, and XX.
• Developing Domestic Carbon Pricing & Credit Mechanisms: Operationalize domestic carbon accounting systems (such as India’s Carbon Credit Trading Scheme) so that carbon charges are collected domestically rather than surrendered to the EU treasury.
• Accelerating Heavy Industry Decarbonization: Expand public-private investments into green steel (using green hydrogen and Electric Arc Furnaces) and renewable-powered aluminium smelting to lower baseline emission intensities.
• Enforcing Global Adaptation Finance Commitments: Push developed nations ahead of COP31 to fulfill their pledges to triple public adaptation funding by 2035, ensuring support is delivered as non-debt grants.

Conclusion:

The EU’s CBAM marks a major shift where international trade policy is directly leveraged as an instrument for carbon enforcement. While the EU justifies the border tax as a shield against carbon leakage, BRICS members view it as a regressive trade barrier that violates multilateral climate equity. Bridging this divide requires establishing credible domestic carbon markets, accelerating industrial green transitions, and ensuring developed nations deliver predictable adaptation finance ahead of COP31.