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Business News/ Economy / India may hit back at EU’s carbon tax

India may hit back at EU’s carbon tax

Counter-tariffs likely as move threatens India’s metal exports

India’s metal industry will face a significant challenge. (Photo: Bloomberg)Premium
India’s metal industry will face a significant challenge. (Photo: Bloomberg)

India is considering imposing retaliatory tariffs on European Union exports in response to the bloc’s proposed carbon tax that could disrupt over $8 billion worth of Indian metal exports to the EU, two government officials aware of the development said.

Starting 1 October, iron, steel, and aluminium exports to European Union countries from across the world will face added scrutiny under the bloc’s Carbon Border Adjustment Mechanism (CBAM), or carbon tax. Suppliers will have to report greenhouse gas emissions ‘embedded’ in their consignments before taxes are levied from 1 January 2026.

Graphic: Mint
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Graphic: Mint

The proposal has triggered trade tensions with the rest of the world and particularly angered the developing world. In India it has raised concerns among metal producers, who fear it will create a new trade barrier for exports to Europe.

Several countries, including India, have called the measure discriminatory and running against internationally accepted principles that give developing countries greater flexibility in climate change policies as they are not historically responsible for creating the crisis.

To be sure, the European Parliament is yet to formally clear the proposal. When it does become law, its compliance with World Trade Organization principles could be tested.

CBAM impacts imports from all non-EU nations except those that possess an emission trading system (ETS) linked to the EU’s ETS. Brazil, Russia, India, China and South Africa collectively condemned the CBAM policy as discriminatory in a joint statement in April 2021.

A senior government official said on condition of anonymity, “We are yet to have the final details of the tax, but we have begun looking at the issues. The government is consulting with the industry, and the carbon tax is expected to have a negative impact on the fossil fuel-based industry. But companies using green hydrogen or solar energy for their productions will benefit. India would also consider imposing tariffs on products coming from the EU."

Queries sent to the spokespeople for the finance ministry, and commerce and industry ministry remained unanswered till press time.

According to industry estimates, India has around 78 GW of installed captive power capacity, of which around 56GW is fuelled by coal.

India’s metal industry will face a significant challenge because of CBAM, given that 27% of India’s iron, steel, and aluminium exports worth $8.2 billion in 2022 went to the EU, according to Global Trade Research Initiative (GTRI). The impact is expected to rise as the EU adds more products to the CBAM list, leading to potentially billions in lost exports and increased costs.

India announced plans to hike non-fossil fuel power generation capacity to 500GW by 2030 at the COP-26 summit in Glasgow.

“The government has been pushing for clean energy, but the EU’s carbon tax has been a major concern for the exporters. We don’t know if it will impact India’s negotiations with the EU, but we are looking into it, and all options are on the table, including imposing tariffs on EU imports," another official stated, also requesting anonymity.

Under the Paris Agreement, developed countries—which have generated 79% of historical carbon emissions—have agreed to bear greater burden in climate mitigation. “CBAM goes against the principle of common but differentiated responsibilities accepted in the Paris Agreement. It imposes the environmental standards of developed countries on developing countries. Instead of helping, the EU will now collect revenue from developing countries through the CBAM mechanism. The EU will use this money as a budgetary resource and not for helping developing countries with climate adoption," the GTRI report added.

Mint earlier reported that steel and aluminium makers such as JSW Group, Vedanta and state-run Steel Authority of India Ltd are working together to reduce their carbon footprint through measures such as moving away from coal and requisitioning more green power.

An EU official said that CBAM is not a trade tool nor a protectionist instrument, and it is simply there to help fight climate change by addressing the risk of carbon leakage. It will be applied in an even-handed manner in a way that does not constitute arbitrary or unjustifiable discrimination against third-country producers or a disguised restriction to trade.

“Through CBAM, all efforts to decarbonise and abate emissions will directly translate into a reduction of the CBAM financial obligation from 2026. The greener the goods brought into the EU, the lower the adjustment. The higher the carbon price paid at the origin, the lower the adjustment will be when goods are imported into the EU.

CBAM will apply to actual greenhouse gas emissions embedded in the exported products. In addition, CBAM will take into account carbon prices actually paid in the originating country," the EU official added.

The CBAM is constructed to treat foreign producers in a manner equivalent to domestic producers. For example, the CBAM charge foreign producers will face will be reduced to reflect any free allowances received by domestic producers and will be adjusted progressively as free allowances are phased out, the official said, defending the proposed carbon tax.

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Published: 20 Mar 2023, 11:34 PM IST
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