EU's carbon tax 'CBAM' likely to affect India's export sector

Union Commerce and Industry Minister Piyush Goyal said on November 2, 2023 that the European Union's proposed Carbon Border Adjustment Mechanism (CBAM), carbon tax on imports is an 'ill-conceived' move that will become difficult for its manufacturing sector.

• Also, Union Minister Goyal said that if the plan is not ultimately abandoned starting from 2026, India will neutralize it by imposing its own carbon tax.
• The EU's CBAM, under which reporting requirements for exporters of commodities like steel came into effect in October, was "unfair" because carbon cannot be priced equally in India and Europe. Indian industry, however, is protected and European producers can shift production to India because of the tax.
• However, this was discussed during the visit of Union Commerce and Industry Minister Piyush Goyal to Europe in late October 2023. It was organized by the Global Energy Alliance for People and Planet and focused on ‘The Energy Transition Dialogues’.

Background of the topic:

• The plan for carbon border tax (CBT) collection by the European Union (EU) (effective from January 1, 2026) may increase India's export costs.
• From October 2023, Indian exporters will have to submit documentation regarding their processes approximately every two months.
• In this context, the EU will soon have 'verifiers' to check the documentation submitted by Indian exporters on their processes.
• Currently it applies only to steel, aluminium, cement, fertiliser, hydrogen and electricity, but in the future it is planned to be extended to all imports into the EU.
• The EU has announced that the CBAM, which would impose a carbon tax on imports of goods made using non-green or environmentally unsustainable technologies, will be introduced in a transitional phase from October 2023.
• The CBAM is proposed to impose a 20 to 35% tax on select imports into the EU from January 1, 2026.

What is Carbon Border Adjustment Mechanism (CBAM)?

• The EU's carbon border tax (CBT) or Carbon Border Adjustment Mechanism/Carbon Border Adjustment Mechanism (CBAM) is a policy measure aimed at imposing a fair tax on carbon emissions generated during the production of certain goods imported into the EU.
• It is part of the 'Fit for 55 in 2023 package', an EU commitment to reduce greenhouse gas (GHG) emissions by at least 55% by 2030 compared to 1990 levels in compliance with European climate law. 
• CBAM will apply to imports of steel, cement, iron and steel, aluminium, fertiliser, electricity etc from countries whose climate policies are less stringent than those of the EU.
• Importers of these goods must purchase carbon certificates that will show the amount of carbon emissions contained in their products.
• The value of these certificates will be equal to the price of carbon in the EU Emissions Trading System (ETS). The ETS is a market-based system that regulates emissions from industries within the EU.

Objective of CBAM:

• The aim is to encourage clean industrial production in non-EU countries and prevent carbon leakage, which is the transfer of carbon-intensive activities to countries with lower environmental standards.

India's concerns:

• Full implementation of CBAM may increase the cost of Indian products and reduce the competitiveness of Indian exports to the EU, especially in sectors such as steel and aluminium, which are a major component of India's trade with the EU. It is a big part.
• CBAM, which will come into effect from January 1, 2026, may impact India's exports to this region in a big way. Because about 26.6% of India's exports of iron ore pellets, iron, steel and aluminum products go to the EU.
• India exports goods worth about US $ 8 billion to the EU annually.
• CBAM is challenging from a compliance point of view. It may also create administrative and technical challenges for Indian producers and importers, who will need to monitor, count, report and verify their emissions in line with EU standards.
• Small Indian companies may suffer losses, as happened in 2006 when the EU imposed a decision to regulate chemical imports.

Against Free Trade Agreement (FTA):

• CBAM is being criticized as a ‘non-tariff barrier’ that circumvents zero duty FTAs.
• India pays the levy, while allowing duty-free entry for so-called 'green' products, which is being seen as a contradiction.

What does India need to deal with CBAM?

• India should oppose CBAM in international forums and formulate an alternative policy against it because this system limits the industrialization potential of the developing world.
• Now India should also develop policies in line with CBAM, the same India is considering levying a tax like CBT on its exports to the EU.
• Apart from the EU, India should reduce its dependence on the EU market by exploring new opportunities in other regions like Asia, Africa and Latin America.
• India should also avail opportunities to make clean production green and sustainable by encouraging green technology in its industrial production. This will provide India an opportunity to remain competitive in a more carbon-conscious future.

All this will result in India's ability to adapt to the international economic system and achieve its 'net zero carbon target by 2070' without compromising its developmental goals and economic aspirations.