EU Carbon Border Policy Could Undermine Global Climate Cooperation, Study Warns

A new study highlights the potential trade and economic challenges posed by the European Union's (EU) Carbon Border Adjustment Mechanism (CBAM), suggesting that unilateral climate policies could hinder global cooperation rather than promote it.

The research, conducted by scholars from the Indian Institute of Management (IIM)-Lucknow and the Institute of Management Technology (IMT)-Ghaziabad, examines the CBAM’s impact on India's steel industry, particularly its small- and medium-sized enterprises (SMEs).

Key Findings of the Study

• Impact on Indian Steel Industry: The study finds that while large integrated steel plants in India may be able to adjust their production to comply with CBAM regulations and supply low-carbon steel to the EU market, smaller and medium-sized enterprises (SMEs) face significant financial, technological, and capacity constraints.

• The "Brussels Effect" and CBAM: The researchers tested the European Union EU’s ability to extend its environmental regulations beyond its borders, commonly known as the "Brussels Effect", to determine whether CBAM would accelerate India's steel industry decarbonization.

• Unequal Decarbonization: The findings suggest that CBAM may create a dual-speed decarbonization process, where larger steel manufacturers comply with EU requirements while smaller firms struggle to meet stringent carbon standards, leading to unequal market competition.

Challenges of CBAM Implementation

The study underscores that CBAM, which has been in effect since October 2023, applies carbon content-based charges on imports of emission-intensive products like steel from countries with less stringent emission regulations, including India. The EU argues that this mechanism is designed to prevent carbon leakage and encourage global decarbonization. However, the research critically examines its real-world feasibility and equity concerns.

Key Issues Identified

• Higher Costs for Exporters: The implementation of unilateral CBAM-like policies across jurisdictions can lead to increased costs for exporters, adding financial strain on developing economies.

• Complicated Trade Relations: Such policies could create trade barriers, making negotiations between the EU and other countries more challenging.

• Weakening Global Climate Cooperation: Instead of fostering collective climate action, CBAM could lead to fragmented and protectionist policies, limiting collaborative efforts to combat climate change.

India’s Role in Global Climate Goals

As the world’s second-largest steel producer, India plays a crucial role in achieving global climate targets. The study highlights that while India has policy frameworks in place to facilitate decarbonization, the steel industry remains highly complex, making it unrealistic to expect CBAM to accelerate the transition overnight.

Recommendations for a Fair Decarbonization Pathway

To address these concerns, the study proposes a set of actionable recommendations for policymakers in the EU and other nations contemplating similar measures. These include:

1. Providing Financial and Technical Support: Assisting developing nations with capacity-building programs and financial aid to help SMEs comply with carbon regulations.

2. Ensuring Policy Equity: Implementing measures that do not disproportionately impact smaller players, ensuring an inclusive transition to low-carbon production.

3. Technology Transfer and Collaboration: Encouraging the EU to support trading partners through technology-sharing agreements and joint decarbonization projects.

India-EU Free Trade Agreement and CBAM Negotiations

The study’s findings are particularly relevant to ongoing India-EU Free Trade Agreement (FTA) discussions, where CBAM compliance and its implications remain key negotiation points. If structured fairly, such mechanisms could promote long-term environmental sustainability without disrupting trade relations.

Need for Collaborative Climate Strategies

Professor Kasturi Das from IMT-Ghaziabad, one of the study’s co-authors, emphasized the importance of fostering global collaboration in climate action.

"If the EU is keen to advance the decarbonisation efforts in its trading partners from the Global South like India, it is essential to complement regulatory measures such as CBAM with supportive initiatives, including technology transfer and capacity-building assistance," Das said.

She further added, "In a fragmented global order, fostering collaborative decarbonisation strategies are essential for meaningful climate action."

Conclusion

The study provides a critical analysis of CBAM’s impact on India’s steel sector, highlighting equity concerns and the need for supportive mechanisms to ensure a fair transition. While large steel plants may adapt to EU’s carbon regulations, small and medium enterprises could struggle without proper financial and technological assistance. This research underscores the importance of collaborative global efforts in climate policy, rather than imposing unilateral mechanisms that may disrupt trade and hinder sustainable development.