Carbon Border Adjustment Mechanism (CBAM): A Double-Edged Sword for Indian MSMEs
The European Union (EU) is taking a significant step towards mitigating climate change with its Carbon Border Adjustment Mechanism (CBAM) Policy. This new policy aims to address “carbon leakage,” where EU companies relocate their operations to countries with less stringent environmental regulations to avoid higher carbon costs. India’s exports to the European Union (EU), worth $37 billion, could be impacted due to the trade bloc’s proposed Carbon Border Adjustment Mechanism (CBAM) The impact would translate into 43 per cent of India’s exports to the EU, which is among India’s key export markets after the United States (US). However, the implications for India’s MSME sector are far-reaching.
What is CBAM?
CBAM will impose a carbon tax on imports of certain goods from countries outside the EU that lack comparable carbon pricing mechanisms. The tax will be calculated based on the embedded carbon emissions in the imported goods. Importers can offset the tax by presenting carbon certificates or other proof of emissions reductions from their supply chains. While CBAM aims to level the playing field for EU companies and incentivize global climate action, it would pose significant challenges and in fact disproportionately impact the MSME sector in developing countries like India .
Reasons for Susceptibility of MSME sector:
i. Limited Resources: MSMEs often have limited financial resources and may struggle to invest in the necessary technologies or infrastructure to reduce their carbon footprint. This could make it difficult for them to comply with CBAM’s requirements.
ii. Complex Supply Chains: Indian MSMEs are often deeply integrated into complex global supply chains. Ensuring that their suppliers and subcontractors also comply with CBAM can be challenging, especially for smaller, less organized businesses.
iii. Lack of Awareness and Expertise: Many MSMEs may not be aware of the implications of CBAM or have the necessary expertise to navigate the regulatory landscape. This could lead to unintended consequences and increased costs.
iv. Data Limitations: MSMEs may face difficulties in accurately measuring and reporting their carbon emissions, which is essential for compliance with CBAM.
v. Limited Access to Carbon Markets: MSMEs may have limited access to carbon markets, which can be a valuable tool for offsetting emissions and managing costs.
These factors combined make Indian MSMEs particularly vulnerable to the impacts of CBAM.
CBAM – A double edged sword
The impact of CBAM on India’s MSME sector is likely to be multifaceted:
Positive aspects:
i. Incentive for Sustainability: On the positive side, CBAM could incentivize Indian MSMEs to adopt more sustainable practices and reduce their carbon footprint. This could lead to increased efficiency, reduced costs, and improved competitiveness in the long term.
ii. Technology Transfer: The need to comply with CBAM could drive the transfer of cleaner technologies and expertise to Indian MSMEs, enhancing their capabilities and innovation.
iii. New Business Opportunities: CBAM could create new business opportunities in areas like carbon consulting, emissions reduction technologies, and carbon credit trading.
Negative aspects:
iv. Increased Costs: For MSMEs unable to significantly reduce their carbon emissions, CBAM could lead to increased costs. This could make their products less competitive in the EU market, potentially affecting their profitability.
v. Supply Chain Disruptions: If Indian MSMEs’ suppliers cannot comply with CBAM, it could disrupt their supply chains, leading to delays or shortages.
vi. Competitive Disadvantages: CBAM could give EU companies a competitive advantage, especially in sectors heavily reliant on imports.
Mitigation Strategies
To mitigate the negative impacts of CBAM, Indian MSMEs can consider the following strategies:
i. Invest in Green Technologies: Adopting energy-efficient technologies and renewable energy sources can significantly reduce carbon emissions.
ii. Improve Supply Chain Sustainability: Working with suppliers to ensure their compliance with CBAM and promoting sustainable practices can help mitigate risks.
iii. Explore Carbon Credit Markets: Offsetting emissions through carbon credits can be a viable strategy for some MSMEs.
iv. Seek Government Support: The Indian government can provide financial incentives, technical assistance, and policy support to help MSMEs transition to a low-carbon economy.
The Road Ahead
CBAM presents both challenges and opportunities for India’s MSME sector. While the short-term impacts may be challenging, the long-term benefits of adopting sustainable practices and reducing carbon emissions are significant. By proactively addressing these challenges and seizing the opportunities, Indian MSMEs can not only navigate the complexities of CBAM but also position themselves for a more sustainable and competitive future.
