Financial, Capacity Constraints Of EU’s Carbon Border Policy

New Delhi: The EU’s Carbon Border Adjustment Mechanism can pose challenges for India’s small and medium-sized steel enterprises due to financial, technological and capacity constraints, an IIM-Lucknow study has found.

Large integrated steel plants may, however, adapt their production to supply lower-carbon steel for the European Union (EU) market, according to the study. Being implemented since October 2023, the Carbon Border Adjustment Mechanism (CBAM) aims to apply carbon content-based charges on imports of certain emission-intensive products such as steel from countries with less stringent emission regulations, including India.

While the EU argued that the CBAM would prevent carbon leakage and encourage decarbonisation, the study critically examined its real-world implications, particularly in terms of equity and feasibility. The research -- conducted with inputs from the Institute of Management Technology-Ghaziabad and Yale University, US -- has been published in the prestigious International Environmental Agreements: Politics, Law and Economics (Springer Nature). “In this first-of-its-kind study in India, the researchers tested the hypothesis whether the EU’s ability to extend its regulation beyond borders, commonly known as the ‘Brussels Effect’, will drive decarbonisation in India’s steel industry through the CBAM,” said Kaushik Ranjan Bandyopadhyay a professor at IIM-Lucknow.

“The research team found that while large integrated steel plants may adapt their production to supply lower-carbon steel for the EU market, smaller and medium-sized enterprises could face challenges due to financial, technological and capacity constraints,” he added. Bandyopadhyay said this could create a dual-speed decarbonisation process, favouring the larger players and leaving the smaller firms vulnerable. The lack of adequate support for smaller and medium-sized enterprises to tackle emissions can lead to unequal outcomes within the industry, he further said.

Additionally, the study highlighted that implementation of unilateral CBAM-like mechanisms across jurisdictions could increase costs for exporters, complicate trade relations and potentially weaken collaborative global climate efforts. “Although policy frameworks are in place in India to facilitate the decarbonisation process in the steel industry, the sector is ridden with complexities. Hence, it would be naive to expect that the CBAM can hasten the process overnight,” Bandyopadhyay said.

The study presented a set of actionable recommendations for policymakers in the EU and other countries contemplating similar measures to ensure that the mechanism fostered an ecosystem for a fair and effective decarbonisation pathway. These recommendations are particularly crucial for India-EU negotiations on the CBAM as part of the ongoing Free Trade Agreement discussions. The European Commission is set to unveil an Omnibus Proposal by the end of February that may simplify the CBAM’s processes and reporting requirements.