EU's carbon border policy may weaken collaborative global climate efforts: Study

New Delhi, Mar 13 (PTI) Implementation of unilateral Carbon Border Adjustment Mechanism-like policies across jurisdictions can increase costs for exporters, complicate trade relations and potentially weaken collaborative global climate efforts, a study has found.

According to the study -- conducted by researchers from the Indian Institute of Management (IIM)-Lucknow and the Institute of Management Technology (IMT)-Ghaziabad -- the EU's Carbon Border Adjustment Mechanism (CBAM) can pose challenges for India's small- and medium-sized steel enterprises due to financial, technological and capacity constraints.

In the first-of-its-kind study, the researchers tested if the EU's ability to extend its regulation beyond borders, commonly known as the "Brussels Effect", would drive decarbonisation in India's steel industry through the CBAM.

The researchers found that while large integrated steel plants might 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.

Co-authored by Kaushik Ranjan Bandyopadhyay, professor and chairperson of IIM-Lucknow's Centre for Business Sustainability, and Kasturi Das, a professor at the IMT-Ghaziabad and a Fulbright-Kalam Climate Visiting Fellow at Yale University, the findings have been published in the prestigious International Environmental Agreements: Politics, Law and Economics journal.

Being implemented since October 2023, the 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 team found that while large integrated steel plants might 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," Bandyopadhyay told PTI.

"This might create a dual-speed decarbonisation process, favouring the larger players and leaving the smaller ones vulnerable. The lack of adequate support for smaller and medium-sized enterprises to tackle their emissions reduction could lead to unequal outcomes within the industry," he added.

The study also 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 research employed a qualitative methodology based on primary data collected from 41 key stakeholders, including representatives from steel companies, industry associations, government bodies, academia, and civil society.

The study highlights that India, as the world's second-largest steel producer, plays a major role in achieving global climate goals, making it essential for CBAM policies to align with principles of equity and fairness.

"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.

"In a fragmented global order, fostering collaborative decarbonisation strategies are essential for meaningful climate action," she added. PTI GJS GJS SZM SZM