A pragmatic approach to carbon pricing may help against climate barriers

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Subscribe to enjoy similar stories. At the recent Energy Transition Summit, finance minister Nirmala Sitharaman underscored the adverse impact of unilateral and arbitrary policies such as the EU’s Carbon Border Adjustment Mechanism (CBAM) on India’s trade and green-transition pathways, noting that India’s decarbonization journey should be guided by its own development needs and not by the Global North. Sitharaman was referring to the EU’s measure that would impose a charge on imports into the EU of products of aluminium, iron and steel, cement, fertilizers, electricity and hydrogen beginning January 2026.

The CBAM levy will be calculated on the difference between the carbon price determined under the EU’s Emission Trading System (ETS) and the carbon price paid in the export country for the production of such products. The EU’s move is accelerating trade friction, given the new barrier it sets up. The US is also reportedly examining a carbon pricing system for imports along similar lines.

There are over 78 different carbon pricing and taxation models worldwide. These fall into two broad categories: ETS and carbon taxes. An ETS works on a cap-and-trade principle, capping the total level of greenhouse gas emissions above which producers pay for their emissions, with prices determined by the demand and supply of emission certificates on a trading platform.

A carbon tax sets a state-determined price for carbon by taxing every tonne of carbon dioxide (CO2) emitted by a production process. While India does not have a formal price for carbon emissions, it is not free. Energy-efficiency targets for energy-intensive sectors, including aluminium and iron and steel, are set under India’s Perform, Achieve, Trade (PAT) regulations