Phase-II of carbon control

January 2026, the CBAM, is a big deal for India

- AJAY SHAH

Discussion on global warming has existed since the early 1990s. For decades, this remained in the domain of conferences, treaties, and corporate social responsibility reports. Practical people often ignored it. Climate-change considerations first impinged upon the real world through the changed behaviour of the global financial system. The mighty tycoons of the Indian business world moved away from fossil fuels because global finance showed them that the path to more wealth lay in renewables. And now, we are ready for the second big impact of climate-change considerations upon reality: The carbon border tax.

This will accelerate global decarbonisation, it will fight global warming, and as India stands to suffer greatly from global warming, this is good news for us. In January next year, the Carbon Border Adjustment Mechanism (CBAM) begins implementation in the European Union (EU). The global trading system is thus at a regime change where polluting firms are directly affected. This requires a reset in how we in India think about business strategy and trade diplomacy.

There is a misconception in some quarters that the CBAM is a form of protectionism. The analogy with value-added tax (VAT) is useful. VAT is a destination-based tax. It is levied where consumption occurs. There is tax neutrality: European producers and Indian producers are treated identically when selling in Europe.

The CBAM applies this same logic to carbon. The EU has a domestic price on carbon. If an Indian firm exports steel to the EU, and pays no carbon tax in India, the EU imposes a levy equivalent to the difference between the EU carbon price and the Indian carbon price. This gives tax neutrality: European producers and Indian producers are treated identically when selling in Europe. This is not protectionism.