Which of the following statements about CBAM (Carbon Border Adjustment Mechanisms) is/are correct? 1. These are an emerging set of trade policy tools to allow movement of carbon-intensive economic activity from a jurisdiction having less stringent climate policy to a jurisdiction having stringent climate policy 2. These are meant to increase the environmental effectiveness of climate policies Select the answer using the code given below:

Correct — B, 2 only. Statement 2 holds: a border carbon adjustment is designed to make a domestic climate policy work as intended, by ensuring that a carbon price at home is not simply undercut by untaxed imports, so the environmental effect of the policy survives contact with trade. Statement 1 has the direction reversed. The problem such a mechanism addresses is carbon leakage — production moving away from a jurisdiction with stringent climate policy towards one with weaker rules, so that emissions are relocated rather than reduced. The statement as printed describes the opposite movement, from weaker regulation towards stricter, and no border carbon adjustment is intended to allow that. The European Union's mechanism, in a transitional reporting phase from October 2023 with financial obligations from 2026, covers cement, iron and steel, aluminium, fertilisers, electricity and hydrogen, several of which matter directly to Indian exporters.

• (a)1 only — It keeps the reversed statement and drops the correct one. Preserving the environmental effectiveness of climate policy is the stated justification for the mechanism.
• (c)Both 1 and 2 — Statement 2 stands but statement 1 does not, because it describes carbon-intensive activity moving towards stricter regulation, which is the reverse of carbon leakage.
• (d)Neither 1 nor 2 — Rejecting both leaves the mechanism without a purpose. Its whole design is aimed at keeping a carbon price environmentally effective.

Where one jurisdiction prices carbon and its trading partners do not, two things can happen. Domestic producers lose ground to cheaper imports made with dirtier processes, and production can shift abroad, so global emissions barely move. A border carbon adjustment charges imports for their embedded emissions at the same rate the domestic producer pays, closing that gap. India has objected that such a levy is a trade barrier dressed as climate policy and that it sits awkwardly with the principle of common but differentiated responsibilities.

The item can be settled by reading statement 1 as a direction of travel. Carbon leakage means activity moving out of a strict jurisdiction into a lax one; a firm has no incentive to move the other way. Once that direction is fixed, the statement fails on its own terms, and only one code survives. For an Indian candidate the mechanism matters because iron and steel and aluminium are among the goods covered and among India's exports to the European Union.

• Carbon leakage is the relocation of production from a jurisdiction with stringent climate policy to one with weaker policy.
• A border carbon adjustment charges imports for embedded emissions to preserve the effect of a domestic carbon price.
• The European Union's mechanism began a transitional reporting phase on 1 October 2023, with financial obligations from 2026.
• It covers cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.
• India has objected that such measures act as trade barriers and sit uneasily with common but differentiated responsibilities.

• Reading the direction of carbon leakage backwards.
• Assuming the mechanism is a tariff; it is framed as an adjustment matching a domestic carbon price.
• Dating financial obligations to 2023; that year began the reporting phase only.

A two-statement item in which the false statement is the true one with its direction inverted, so careless reading loses the mark.

• practice — not a real PYQ

  Carbon leakage refers to

  • (a)The escape of carbon dioxide from geological storage
  • (b)The shift of carbon-intensive production to jurisdictions with weaker climate policy
  • (c)The loss of carbon from soils under intensive farming
  • (d)Errors in national greenhouse gas inventories

  Answer(b) The shift of carbon-intensive production to jurisdictions with weaker climate policy — the problem a border carbon adjustment addresses.

• practice — not a real PYQ

  Which of the following goods is covered by the European Union's carbon border adjustment mechanism in its initial scope?

  • (a)Textiles
  • (b)Iron and steel
  • (c)Pharmaceuticals
  • (d)Processed food

  Answer(b) Iron and steel — along with cement, aluminium, fertilisers, electricity and hydrogen.