The European Union’s Carbon Border Adjustment Mechanism (CBAM), initiated as part of its Green Deal, aims to reduce greenhouse gas emissions by 55% before 2030. From October 1, 2023, CBAM entered its transitional phase, introducing a fee on the carbon emissions of certain imports, including steel, aluminum, fertilizer, electricity, cement, and hydrogen. This move has significant implications for countries like India, which are major exporters of these commodities to the EU.
India’s Response and Alternatives Explored
In response to the potential impact of CBAM on its exports, India is exploring several strategies:
- Price Negotiation and Tax Repatriation: India is considering negotiating the inclusion of an amount equivalent to the carbon tax in the final price of products imported from the EU. For instance, if steel is exported to the EU with a $100 per tonne carbon tax, India proposes to negotiate adding an extra $100 per tonne to a similar item imported from the EU. This approach aims to bring the tax collected from Indian companies back to the country. Additionally, the repatriation of the amount collected as carbon tax is being considered to support India’s climate mitigation efforts.
- Impact on Specific Sectors: The aluminum sector anticipates a 25% price impact due to the CBAM. Stakeholders in this sector are advocating for carbon tax to be factored in during price negotiations for goods imported from the EU. Moreover, it’s proposed that the carbon tax paid should be specific to the company and returned to them at the time of import from the EU.
Current Data and Impact Assessment
A report by the Global Trade Research Initiative (GTRI) highlights that in 2022, 27% of India’s exports of iron, steel, and aluminum products, worth US$8.2 billion, were to the EU. Starting January 1, 2026, the EU’s collection of carbon tax on each consignment of steel and aluminum could see Indian firms paying an amount equivalent to 20-35% of tariffs. The impact of CBAM on India will largely depend on the carbon intensity of exported products and the availability of low-carbon substitutes in the EU market. High carbon intensity products will likely face higher charges, reducing their competitiveness. However, if no low-carbon substitutes for Indian products exist in the EU, the impact may be limited.
Challenges and Future Strategies
One of India’s major challenges is the absence of an emissions trading system (ETS) similar to the EU’s, making it difficult for Indian businesses to prove that their products are produced using low-carbon technology. To mitigate the impact of CBAM and remain globally competitive, India needs to implement a carbon pricing mechanism and develop low-carbon technologies. This approach will assist Indian businesses in complying with CBAM regulations and reduce the carbon intensity of their products. Furthermore, India must revise its export strategy, identifying alternative markets where its products can remain competitive despite the impact of CBAM in the EU market.
Conclusion
India’s proactive measures to counter the impact of the EU’s CBAM reflect its commitment to sustainable trade and environmental responsibility. By exploring innovative solutions such as tax repatriation and price negotiations, India aims to protect its export interests while aligning with global carbon reduction goals. The country’s ability to adapt to these new global trade norms will be crucial for its future economic and environmental sustainability.