Will India get a four-year breather on carbon tax?

Companies will also need to submit compliance reports every quarter. (Photo: HT)
Companies will also need to submit compliance reports every quarter. (Photo: HT)

Summary

  • Under the EU’s carbon control regime that kicks off in 2026, emissions should be reduced 2.5% in the first year and reduced every year after that, and eliminated by 2034

New Delhi/Mumbai: India plans to seek a four-year delay in the start date of the European Union’s contentious carbon tax to provide more breathing space to its exporting industries, multiple people aware of the matter said.

Under the EU’s carbon control regime that kicks off in 2026, emissions should be reduced 2.5% in the first year and reduced every year after that, and eliminated by 2034. There are different targets set for every year and the current plan aims to reduce emissions by 48.5% by 2030. Collection of carbon emission data began in October.

“We will engage with the EU separately on the matter and seek an extension in the carbon tax timeline to ensure that Indian companies do not lose out on that business," said a government official, one of the two people cited above.

India is keen on a full waiver of the Carbon Border Adjustment Mechanism (CBAM), and a relaxed deadline is its second option. “The Indian government wants this requirement (emission control) to be waived for India as the first option, but if this can’t happen, then the second option is to defer the 2026 timeline to 2030. Indian companies need time since it will require a lot of investment and upgrades in the ecosystem," said a second person, a top executive at a steelmaker.

The EU’s carbon tax plan is in line with its aim to turn climate-neutral or net-zero by 2050. For this, companies from seven carbon-intensive sectors—steel, cement, fertilizer, aluminium, iron, electricity, and hydrogen—will have to share data about their carbon emissions with the EU. Companies will also need to submit compliance reports every quarter. Any neglect or misreporting may trigger stiff penalties, as the EU looks to address the problem of “carbon leakage" through goods entering the EU.

According to ICRA, Indian steel made up 30-40% of European steel imports in FY23, totalling 3.5-5 million tonnes (mt), up from 15-20% in FY21, when it stood at 2-3 mt.

Indian manufacturers have opposed the carbon tax as it will make their products pricier and render them uncompetitive in European markets. The Indian government, which is negotiating free trade agreements (FTAs) with the EU and the UK, has decided to keep carbon tax matter out of these discussions to conclude the trade deals fast. Meanwhile, the lack of progress in resolving the CBAM matter has cast a cloud over the future of Indian steel exports to the region.

Analysts say that advancing the deadline would help steel makers, but hamper India’s carbon reduction plans.

“The carbon footprint of Indian mills significantly higher than many other competing suppliers to the EU. Therefore, unless the carbon footprint of Indian steel mills is brought at par with global standards, it can potentially lead to lower profits and a loss of market share in Europe for domestic producers," said Priyesh Ruparelia, vice-president and co-group head of corporate ratings at ICRA Ltd.

“While postponement, if any, would provide additional time to domestic steelmakers to invest in the aforesaid decarbonization measures and turn better preparedness to manage the additional tax burden, it would hamper India’s efforts in attaining its net zero target," he added.

Industry data suggests that current carbon emission by the top five Indian steel makers stands at 2.5 mt of Co2 per million tonne of crude steel produced in blast furnaces, which is 9-10% higher than the global average. It also much worse than 1.65 mt of CO2 per of mt crude steel produced from electric arc furnaces.

An ICRA analysis showed that with the modest pace of the proposed reduction between 2026 and 2029 under CBAM, taxes for EU exports by domestic primary steel producers are expected to be $60-70 per mt (about 12% of international HRC price currently), which would weigh on mill profits. Taxes are expected to swell to $100-165 per mt (18%-30% of current HRC prices) between 2030 and 2034, as EU moves closer to its net zero target.

 

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