The European Union (EU) will implement its Carbon Border Adjustment Mechanism (CBAM) in 2026. This entails taxing imports based on the carbon emissions involved in producing the goods. The tax is also applied to domestically produced products. As such, the EU claims that this is not a protectionist measure as it applies equally to domestic- and foreign-produced goods. The goal is to discourage carbon emissions. Goods produced without carbon-emitting energy will not be taxed.

Despite the EU claim that the measure is not protectionist, it has generated considerable criticism and angst overseas. The finance minister of India, Nirmala Sitharaman, said that the CBAM will hurt the development of emerging nations, thereby reducing their ability to pay for the energy transition. Specifically, she said that the CBAM is a “trade barrier” and that it will stifle the green transition.

Currently, India generates more than half its electricity by burning coal. Thus, the CBAM applied to Indian exports to the EU will be substantial and likely hurt export volume. This, in turn, will hurt economic growth, thereby reducing the ability to make the energy transition. Yet absent the CBAM, European companies would be at a competitive disadvantage. The implementation of the CBAM has already been postponed once. It is not clear if this will happen again.