The EU’s plan to collect a carbon border tax with effect from January 1, 2026, could raise the cost of India’s exports by 20-35 per cent, according to experts seized of the matter. Beginning this October, Indian exporters are supposed to submit documents on their processes roughly every two months. The EU is likely to have ‘verifiers’ in place soon to vet these submissions — now applicable to steel, aluminium, cement, fertilizer, hydrogen and electricity but to be expanded to all imports into the EU in due course.
Research by Global Trade Research Initiative (GTRI) suggests that producers of iron, steel and aluminium products will feel the heat, as the EU accounts for 26-27 per cent of their exports, or $8.2 billion in CY2022. A threat looms over these industries as their compliance and final product costs are expected to rise as a result of an unjust levy. The question is: how should India respond? It can do so through a two-track approach. The first is to resist the carbon border adjustment mechanism (CBAM) in multilateral forums. It goes against the principle of ‘common but differentiated responsibility’, by not allowing the developing world their space to industrialise. By levying a carbon tax on imports, based on documented levels of carbon emissions, the EU and the developed world are going back on their promise of funding the ‘green transition’ of the rest of the world. In fact, the funds will flow in the opposite direction.
The second route is work around CBAM. A recent report by this newspaper says that India is considering collecting such a tax on exports headed to the EU. The EU has apparently not raised any in-principle objections. Although the producers will end up paying the same tax, the funds so collected can be used to ‘green’ the processes concerned, reducing such taxes later. However, there are many imponderables here, including whether EU will play along. India’s idea could spur about 50 exporting countries with carbon credit markets in place to do the same. It remains to be seen whether India can selectively tax some producers of the same product, simply because of the markets to which these goods are headed, without raising questions of law, domestically and internationally. A wider imposition of this tax by India would render industry uncompetitive and create a high cost economy, inviting imports from non-CBAM countries.
CBAM is a blatant non-tariff barrier. It makes a mockery of zero duty FTAs — where India pays this levy, while throwing open its doors to free and supposedly ‘green’ products. CBAM is also a huge compliance headache. It boggles the imagination as to how the EU will deal with firm-level data at a global level. India’s smaller firms will lose out, as they did when the EU imposed a strict regime in 2006 (EU REACH) to regulate chemicals imports. India and others must devise a pushback strategy. This is a smoke and mirrors game.
