Industry
Mint Explainer: Is the EU's Carbon Border Adjustment Mechanism an unfair ‘lagaan’?
Summary
- The so-called carbon tax, set to take effect in 2026, will hobble Indian manufacturers and exporters to protect their European competitors during the EU’s transition to sustainable energy
New Delhi: The European Union’s much-debated ‘carbon tax’ on imported goods, which has industrial goods manufacturers worried about a potential dampening of margins on their exports, entered into a transitional phase on Sunday. The EU is seeking to impose this first-of-its-kind tax – called the Carbon Border Adjustment Mechanism – on the import of carbon-intensive goods as it looks to become a climate-neutral or net-zero carbon economy by 2050.
European companies from seven carbon-intensive sectors – steel, cement, fertiliser, aluminium, iron, electricity and hydrogen products – will have to share data about their carbon emissions with the EU. Importers will be required to send quarterly CBAM reports, and any neglect or misreporting will lead to stiff penalties.
Mint delves into the complexities of the carbon tax and how well India is prepared for it.
A carbon tax, you say?
The CBAM is aimed at helping the EU achieve its goal of achieving net-zero emissions by 2050. It looks to address the problem of “carbon leakage" – that is, carbon-intensive goods entering the EU through imports.
With it, the EU is trying to make importers of such goods bear a burden equivalent to the costs of European producers. In other words, the EU is doing this to ensure that the EU industries don’t lose any competitiveness because of their transition to more sustainable ways of producing energy.
It will require the importers of carbon-intensive goods to buy enough CBAM certificates to cover the emissions embedded in their products. In doing so, it puts a ‘fair price’ on the carbon emitted during the production of such goods and encourages cleaner industrial production in non-EU countries.
The gradual introduction of the CBAM is aligned with the phasing-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of European industry.
What’s the timeline for this tax?
The transitional phase of the CBAM will last from 1 October 2023 to 31 December 2025. During this period, Indian firms will have to provide extensive production and emissions data for products exported to the EU. The tax collection phase begins on 1 January 2026, with more items being added before then. By 2034, all goods imported into the EU are to be included in CBAM.
The objective of the transition period, the EU said, is to serve as a pilot and learning period for all stakeholders (importers, producers and authorities) and to provide useful information on embedded emissions to refine the methodology.
Where do Indian companies stand?
India’s carbon emissions in the steel sector stand at around 2.55 tons of CO2 per ton of steel produced – far higher than the industry standard. But in the global cement industry, which accounts for about 8% of greenhouse gas emissions worldwide, the Indian cement industry has the lowest carbon emissions.
According to the Indian government’s Third Biennial Update Report submitted in early 2021 to the United Nations Framework Convention on Climate Change (UNFCCC), the agriculture sector contributes 14% of the country’s greenhouse gas emissions. India also ranks second in the production of nitrogenous fertilisers and third in phosphatic fertilisers.
Large steel producers have already started transitioning to making steel in a more environmentally sustainable way. The main challenge for companies will be to monitor and report the carbon emissions of every product they make. This will drive up the costs for Indian manufacturers even as they continue to compete with Chinese steel.
A lack of data could cause the EU to calculate taxes based on default or maximum values. Additionally, failure to submit the required data may result in penalties, which could be especially disruptive for small enterprises.
Under CBAM, the seven chosen sectors will also face an additional tariff of between 20-35% from 2026. This will also hamper Indian industry, which has significant export interests in Europe. The EU was the destination for nearly 17% of Indian exports in 2012-2021.
Certainly, most Indian exporters are unprepared for CBAM. Many small manufacturers are hoping for a last-minute deal between the Indian government and the EU that allows them to continue business as usual.
What is New Delhi’s stance?
CBAM has been criticised as a trade-restrictive policy, especially by developing countries such as India, which has a target of becoming carbon-neutral by 2070. New Delhi may also find it imperative to take its case to the World Trade Organisation (WTO).
The ministries of the various seven affected sectors, along with the finance minister, are currently discussing how to tackle the situation. Simultaneously, they reportedly want all affected companies to start reducing their emissions and comply with the regulations.
The impact of the EU’s carbon tax on Indian manufacturers and exporters will only be known once it is implemented, but according to cabinet minister Piyush Goyal the government will make sure to limit any adverse impact on Indian exporters.
