The European Commission on Friday said the sole aim of CBAM -- a tax the European Union plans to impose on energy-intensive goods from countries like India and China -- is to prevent carbon leakage, a situation where companies decide to shift out their production from a country with stringent policies.

European Commissioner Wopke Hoekstra made this statement at a press conference at the UN climate talks here even as India's Commerce and Industry Minister Piyush Goyal threatened retaliatory action at an event in New Delhi.

Hoekstra said, "CBAM's sole aim is to prevent carbon leakage." Peter Liese, a German politician and a member of the European Parliament, said the bloc aims to reduce emissions by 55 percent by 2030 and that achieving such a significant reduction without CBAM would not be feasible.

Stressing that CBAM is crucial for funding the bloc's climate goals, he cautioned that any attempt to dismantle it would have far-reaching consequences beyond its scope. "Any agenda to destroy CBAM will destroy much more than that." After the G20 Summit in Delhi spotlighted the issue, the BASIC group of countries (Brazil, South Africa, India, and China) have raised concerns at COP28 in Dubai, saying this will harm livelihoods and economic growth.

The Carbon Border Adjustment Mechanism (CBAM) aims to set a fair price on the carbon emitted during the production of energy-intensive products, like iron, steel, cement, fertilizers and aluminium, entering the EU. It also encourages cleaner industrial production in non-EU countries. Companies meeting the EU's carbon emission standards are exempt from this.

The carbon tax will come into effect from January 1, 2026. During the trial period, which started on October 1, 2023, companies from seven carbon-intensive sectors, including steel, cement, fertiliser, aluminium and hydrocarbon products, have to share emissions data with the EU.

A recent study by the United Nations Conference on Trade and Development (2021) shows that through CBAM, a USD 44 per tonne carbon tax would cut leakage by more than half, from 13.3 percent to 5.2 percent.

According to a study conducted by New Delhi-based public policy think tank Centre for Social and Economic Progress (CSEP), Indian exporters of steel and aluminium could lose up to USD 2 billion due to border taxation in European countries, bearing in mind that, India was the eighth-largest exporter of iron and steel to the EU in 2019.

Some believe that while carbon taxes may prompt producers to reduce emissions, it diverts the focus of resource-deficient countries from adapting to climate impacts to cutting emissions.

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