Preparing for the Carbon Border Adjustment Mechanism (CBAM)

The ability to accurately and credibly calculate emissions is key to avoid paying higher duties under CBAM, especially for businesses with cleaner production processes.

Why should you be concerned about CBAM?

Illustration of how CBAM will operationalise

The impact of CBAM is complex

Conditional Exemption to CBAM: can your business benefit?

A three-step approach: Identify, Calculate, and Reduce

1. Reduce your direct emissions: For the transitional period, CBAM is applicable only to scope 1 emissions (emissions associated with fuel combustion in boilers, furnaces, vehicles) embedded in the product. Investing in greener technology that reduces Scope 1 emission intensity such as alternative fuel sources (biofuel, waste to energy) and more energy efficient equipment to bring down the embedded emissions almost immediately.

2. Assess your supply chain: It may also be in your business’ interest to rethink sourcing. Find suppliers with less carbon intensive production processes with lower scope 1 emissions. This reduces the emission intensity across the value chain and hence reduces the potential impact of CBAM.

Another short-term solution is to restructure export destinations. Until technical or strategic solutions to reduce emissions are achieved, business may want to sell products with lower embedded emissions to EU based importers and sell emission intensive products to countries that do not have an ETS or carbon pricing mechanism. Export reshuffling can only be a transitioning strategy as countries and companies put greater impetus on achieving their own net-zero targets. Consumers too, are becoming increasingly aware of the importance of making sustainable choices. In this context, reducing emissions not only prevents businesses from falling to punitive measures but can potentially provide a competitive edge. Some Indian companies have voluntarily established internal carbon pricing to reduce emissions and encourage innovation in the field of a low-carbon economy. These companies may benefit from exemptions under CBAM. The government too is working to cushion the industries from impact by working on its own Carbon Credit Trading Scheme. This could help counter the impact of a carbon border tax. While the details of such a scheme are not yet known, the industry can expect developments in the coming months.

Key Takeaways:

EU’s CBAM is a complex mechanism that enforces climate commitments across the supply chain. As India awaits the introduction of its own ETS, industries remain vulnerable to duties that inflate cost of products and diminish the competitive edge. A three-step approach to potentially limit the impact of CBAM on your business is:

  1. Identify which of the products fall under the scope of CBAM to examine how exposed your business is to ramifications under CBAM.
  2. Once identified, work towards reducing embedded emissions in the products by opting for low-carbon materials or investing in greener technology.
  3. Lastly, set up a robust monitoring system to effectively calculate emissions embedded in your products to avoid repercussions of punitive measures under CBAM.



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