The Verdant Compass: Navigating the complexities of Global Green Taxonomy

-Nikita Chauhan, Senior Associate,

Lakshmikumaran & Sridharan Attorneys

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The global economic landscape is being redrawn by powerful trends of sustainability, coloring the principles of trade and investment in hues of green. “Carbon trading” and “green taxonomy” were niche terms once, but today they are shaping global commerce, investment, and industry. This quiet evolution, which aims to steer capital and conscious towards a sustainable future, is creating a promising yet challenging landscape for countries and businesses alike.

While countries navigate the vast macrocosm of establishing regulations, manufacturers and businesses are struggling with the microcosm of monitoring emissions, collecting data, and ensuring compliance. Climate change mitigation is a critical agenda around the globe, and the rise of carbon pricing mechanisms is a policy intervention being adopted by various countries to promote and incentivize sustainable choices.

WHAT IS CARBON PRICING?

Carbon pricing, as the name suggests, puts a cost on the emission of carbon dioxide and other greenhouse gases, essentially assigning a monetary value to these emissions. The quantum of greenhouse gas emissions is made directly proportional to the financial implication, thereby encouraging businesses to lower their emissions.

Various carbon pricing strategies, being adopted worldwide, include:

·       Direct Carbon tax: a direct fee on emissions

·       Cap-and-trade: a system where a maximum limit is set on permissible emissions (cap), and if that limit is breached, the manufacturer is required to buy allowances (through trading) for additional emissions. These are often referred to as Emissions Trading Systems (ETS)

·       Indirect Carbon tax: taxes on non-renewable sources of energy, subsidies for green energy etc. to promote sustainable and green energy

The above strategies are anchored by the polluter pays principle, which states that those responsible for generating pollution should consequently bear its costs.

INCREASE IN GLOBAL COVERAGE OF EMISSIONS

There has been an optimistic rise in the share of global greenhouse gases covered by carbon pricing mechanisms. As per the World Bank’s Report on State and Trends of Carbon Pricing, these measures cover approximately 28% of global greenhouse gas emissions.

Multiple countries are currently working on their own carbon pricing mechanisms. Through these mechanisms, they aim to put a carbon price on the domestic production of certain greenhouse gas intensive products.

Source: World Bank’s Report on State and Trends of Carbon Pricing, 2025

In addition to internal carbon pricing mechanisms, countries are also developing cross-border adjustment mechanisms to account for carbon emissions during cross-border trade. The major aim of these cross-border mechanisms is to equalize the carbon price levied on imported goods, with the carbon price levied on domestically manufactured goods.

The leading example of such cross-border mechanisms is the European Union’s Carbon Border Adjustment Mechanism (EU CBAM). The EU CBAM, the first of its kind, entered into its transitional phase in October 2023. Since then, importers in the EU are required to submit a quarterly CBAM report, prepared according to the calculation methodologies provided in the CBAM Regulation. The CBAM Reports provide the details regarding the emissions of certain greenhouse gases during the production processes of the goods covered under the CBAM.

It is important to note that although the ultimate obligation of submission of quarterly CBAM reports is of the EU importers, the burden to prepare these reports is passed on to the manufacturers of the specified goods in third-countries. Currently, importers in the EU are not obligated to pay the carbon price equivalent to the emissions. Beginning January 2026, the obligation to pay the carbon price equivalent to the emissions will commence, and EU importers will be required to buy and surrender CBAM Certificates.

Other countries are also developing their own cross-border adjustment mechanisms. The United Kingdom has announced that it shall be introducing its own CBAM starting 2027. Several other countries are also working on similar instruments.

However, these are uncharted waters, and the seamless implementation of these policies will require significant time and effort from the countries, as well as the stakeholders who will be liable to discharge the carbon prices. As the coverage and importance of carbon pricing mechanisms increases, it is important to address the on-the-ground challenges.

Manufacturers - The Primary Stakeholders: Carbon pricing mechanisms identify and put a price on emission of greenhouse gases. Hence, in each sector that is covered under these mechanisms, the manufacturers are the primary stakeholders that are required to comply with these policies and address the challenges arising out of the complex compliance requirements.

The Data Labyrinth: The foundation of each carbon pricing mechanism is the emission data at manufacturing level. The burden to collect, filter, and assemble the required data can be a time, effort, and money intensive task, especially for small and medium enterprises. For manufacturers with a complex supply chain of raw materials, this challenge gets amplified further. Therefore, the establishment of proper monitoring systems and robust data collection mechanisms is required.

The Ambiguity of “Green”: As countries continue to introduce their own carbon pricing strategies and mechanisms, there is still ambiguity regarding the scope of coverage of these mechanisms. Each mechanism is being designed in its own way, and unless the universal grid is harmonized, the methodologies of carbon pricing mechanisms will remain inconsistent.

For instance, the sectors identified for the imposition of carbon price under the EU CBAM and the UK CBAM are different. The sectors identified under the EU CBAM are iron and steel, aluminium, cement, fertilisers, hydrogen and electricity.

Under the upcoming UK CBAM, initially the sectors identified were iron and steel, aluminium, cement, ceramics, fertilisers, glass and hydrogen. The sectors were further modified, and glass and ceramics were removed temporarily for the initial implementation of the UK CBAM in 2027.

Hence, owing to the sheer complexity of introducing a cross-border adjustment mechanism, the sectors identified by different countries may vary. As more countries introduce their own cross-border adjustment mechanisms in due course, the differences in the sectors identified and calculation methodologies will pose a challenge, and the stakeholders may have to adopt different approaches for exporting the same products to different countries, unless these mechanisms are unified.

The Disintegrated Carbon Market: Since the mechanisms differ, the carbon markets are naturally volatile. Currently, countries have disintegrated carbon pricing mechanisms. The carbon price also varies from country to country. Hence, if a manufacturer is already paying the carbon price in one country, for example, in the country of manufacture, it may not necessarily mean that the obligation of paying in another country has been resolved completely, that is, the country of export. For instance, the carbon price imposed on the per tonne emission of greenhouse gases in Country 1 may be higher than that in Country 2.  In this case, an importer in Country 1 may have to pay the remainder of the carbon price while importing the goods into Country 1 from Country 2.

WHAT MUST THE STAKEHOLDERS DO?

Thorough Data Collection: For the calculation of emissions during manufacturing, the first step is to collect the relevant data accurately. Manufacturers must implement proper data collection mechanisms and maintain records of raw material consumption, fuel consumption, electricity consumption and production. Currently, the carbon price mechanisms are still taking shape. The manufacturers that implement proper strategies at this stage will benefit going forward as requirements solidify and become more stringent.

Coordination with Raw Material Suppliers: Manufacturers must coordinate with the relevant raw material suppliers as well, as the carbon footprint of raw materials that may be covered under carbon pricing mechanisms will have to be added to the carbon footprint of the manufactured product.

Transition towards Sustainable Manufacturing: The ultimate long-term solution for all manufacturers is to start moving towards sustainable manufacturing, including identification of renewable energy sources, green technologies and supply chain mapping to identify sustainable raw materials with the least carbon footprints.

THE WAY FORWARD

At this stage, the carbon pricing mechanisms may pose various challenges for manufacturers and businesses. However, these mechanisms are also an opportunity to promote sustainability. Manufacturers that adapt the quickest to these sustainability driven changes will be able to march ahead by showcasing their commitment towards sustainability. Navigating this new terrain shall demand adaptability, foresight, and perseverance, and those best prepared, will map tomorrow’s sustainable markets and set the standards for the future.