India, a significant player in the global economy, holds a crucial position in both economic development and environmental responsibility. Despite this, the country ranks as the world’s third-largest emitter of CO2, following China and the US. Studies indicate that emissions in India could surge by up to 50% by the year 2030. To combat this concerning trend, a carbon tax has been introduced with the primary aim of reducing emissions and curbing the reliance on fossil fuels such as coal, gas, and oil.
India’s proactive involvement in the G20, as a response to the challenges posed by carbon emissions, and its collaboration with the EU underscore its dedication to global climate action. However, recent developments have brought a new twist to the scenario. The EU has announced the implementation of a carbon tax known as the Carbon Border Adjustment Mechanism (CBAM), set to take effect from January 1, 2026. This tax will be imposed on the import of seven carbon-intensive sectors, including steel products, iron and iron ore concentrates, cement, aluminum products, fertilizers, hydrogen, and electrical energy.
The CBAM rollout is planned in four phases, with tariffs ranging from 20-35% on imports of these high-carbon goods. Unsurprisingly, India, along with other Asian nations, has not taken this decision lightly. The bloc has strongly opposed the EU’s new tax policy, labeling it as unfair. The impact of the EU’s Carbon Border Tax (CBT) on India has raised concerns among government officials, who view the proposed CBAM as discriminatory and a potential trade barrier affecting not only Indian exports but also those of many other developing nations.
The World Trade Organization (WTO) has also expressed reservations about the fairness of the EU’s taxation policy, particularly when India is already committed to the Paris climate agreement’s protocols aimed at achieving carbon neutrality by 2070. In 2022, 27% of India’s exports of iron, steel, and aluminum products, valued at USD$8.2 billion, were destined for the EU. The introduction of this high tax is expected to boost the EU’s revenue significantly while posing challenges for major Indian conglomerates like Tata Steel, Steel Authority of India, JSW Steel Group, and Essar Steel India Limited.
To fully grasp the implications of the new CBAM tax, one must analyze India’s exports to the EU in a single year, as demonstrated in the provided chart. India’s current carbon tax rate is one of the lowest globally, standing at just USD$1.6 per tonne of CO2 emissions. However, the EU’s CBAM is poised to impact India’s exports of energy-intensive items, including key trade commodities such as steel, aluminum, cement, and fertilizers. The Indian export market is likely to face increased production costs, reduced demand, and heightened competition within the European economy.
Among the various sectors affected, the steel industry stands out as the toughest to decarbonize, with the highest carbon intensity contributing to approximately 8% of global emissions. The impact of the EU’s CBT on India will hinge on the carbon intensity of exported products and their substitutes in the EU market. Products with high carbon intensity may face elevated charges and reduced competition. However, if low-carbon alternatives for Indian goods are scarce in the EU market, the impact of CBAM on Indian exports could be limited.
In response to the EU’s tax policy, Mr. Piyush Goyal, India’s Commerce and Industry Minister, has vowed to address the CBAM issue confidently and seek solutions to potentially convert it to India’s advantage. The Indian government is considering filing a complaint with the WTO against the EU’s tax policy to safeguard domestic exporters and MSMEs. Despite the ongoing war of words, the EU’s trade chief, Valdis Dombrovskis, maintains that the CBAM was carefully designed to comply with WTO rules by applying the same carbon price to imported goods as domestic EU producers.
Efforts are underway to find an amicable resolution to the conflict between India and the EU. Both parties are engaged in discussions and exploring solutions to minimize the impact of CBAM on the Indian carbon market. As the situation unfolds, the Indian government is already taking proactive steps to mitigate the potential fallout from the EU’s CBAM. These measures include developing a robust domestic carbon pricing system, encouraging businesses to assess their carbon footprints, promoting investment in renewable energy sources, and boosting the production of electric vehicles to foster sustainable growth.
Furthermore, India aims to ramp up domestic capacity, invest in carbon capture and storage technologies, and reduce the carbon footprint of heavy industries. While the EU’s carbon tax poses challenges for Indian industries, it also presents an opportunity for positive change in the Indian carbon market. The resilience of the Indian economy suggests that it can embrace this challenge as an avenue for a smoother transition towards green energy. Both India and the EU are committed to addressing the CBAM crisis diplomatically and fulfilling their obligations under the Paris Agreement.
As discussions continue and developments unfold, it is evident that India is proactively preparing to navigate the implications of the EU’s CBAM. With a focus on sustainability and innovation, India is poised to adapt to the changing landscape of global carbon taxation and emerge stronger in the pursuit of environmental goals.
