Carbon Border Adjustment Mechanism and its implications for insurance and arbitration

Abstract

On October 1, 2023, European Union (EU) started the transition phase of Carbon Border Adjustment Mechanism (CBAM) which is a carbon tax initially imposed on any goods entering into the EU countries belonging to Energy Intensive industries like Cement, Iron & Steel, fertilizers etc. After the transition phase is over, in 2026 it will be implemented for types of goods. While it is a right step for EU to move significantly towards its carbon neutrality targets, it poses serious issues to other countries who have trader relationships with the EU. Any kind of carbon tax triggers development of carbon pricing mechanisms in every country, arriving at a common mechanism to account for the greenhouse gas emissions and differential treatment required for emerging and frontier economies. In this paper a thorough review of literature was done to understand various aspects of CBAM and its impact on cross-border trade; approaches followed by various countries towards a carbon tax; impact on consumer prices to arrive at the future directions of research and implications for insurance and arbitration. It is concluded that any carbon tax will put a stress on insurance and arbitration of trade disputes till the time a common platform is developed for accounting for an emission based tax or carbon tax which is acceptable to all countries of the world. It also highlights the risks associated with insurance and arbitration and possible mitigation mechanisms for the same.