Carbon tax is a thorn. But that won't hold up free trade talks | Mint

Carbon tax is a thorn. But that won't hold up free trade talks

India exported about 3.6 million tonnes of finished steel to Europe and 0.4 million tonnes to the UK in 2023, shows data from SteelMint.
India exported about 3.6 million tonnes of finished steel to Europe and 0.4 million tonnes to the UK in 2023, shows data from SteelMint.

Summary

  • The absence of any agreement on the carbon border adjustment mechanism (CBAM) casts a cloud over Indian steel exports to the region.

NEW DELHI , MUMBAI : India’s free trade talks with the UK and European Union (EU) may skip the vexed carbon tax matter in an attempt to fast-track the trade deals, three people aware of the matter said.

The absence of any agreement on the carbon border adjustment mechanism (CBAM) casts a cloud over Indian steel exports to the region, as it would raise the cost of exports and eat into profits. India is negotiating separate free trade agreements (FTAs) with the UK and EU.

“There is a sense of urgency in finalizing these FTAs and arriving at some consensus since the government’s term is set to end," one of the three people said on the condition of anonymity. Talks on the CBAM would be held separately by the steel and external affairs ministries with their foreign counterparts, the official added.

The ministries of commerce and steel did not respond to queries sent on Monday.

The EU’s CBAM, and a similar policy of the UK, seek to levy a carbon tax on imports into the region of iron and steel, aluminium, cement, ceramics, fertilizer, glass and hydrogen from January 2026. The UK and EU say the levy aims to put a fair price on carbon emitted when these goods are produced outside the region, and protect local producers from price disadvantages.

Indian steelmakers have been lobbying the government to seek concessions on CBAM as part of the ongoing FTA discussions, said two more people aware of the matter. However, with the topic now out from the discussions, it adds uncertainty for Indian steelmakers. Queries sent to the Indian Steel Association, the leading lobby of the domestic steel industry, remained unanswered.

A steel industry executive said the exclusion of CBAM from FTA negotiations could be a strategic move on India’s part. “The opacity in the EU or the UK’s emission calculation mechanism raises concerns. Integrating CBAM into the FTAs at this stage would be akin to surrendering our own weapon until we gain clarity on the matter," the executive said on the condition of anonymity.

CBAM compliance requirements could pull down the profits of Indian steel exports to the EU by $60-165/tonne between 2026 and 2034, according to an analysis by Icra Ltd. The impact could be similar for exports to the UK, experts said.

Unsurprisingly, Indian steelmakers see CBAM as a trade barrier. “Our stance is clear: CBAM acts as a trade barrier, contributing to a trade imbalance. The EU mandates adherence to their norms, but CBAM lacks consideration for the historical emissions of developed nations. I do not believe CBAM should be a mandate in FTA negotiations," said Prabodha Acharya, chief sustainability officer, JSW Group. JSW Steel Ltd, part of the group, is one of India’s top steel exporters.

“The prospect of a large carbon tax from January 2026 can incentivize European and UK importers to shift towards steel producers having a lower carbon footprint than India ahead of the outer deadline," said Jayanta Roy, senior vice president, Icra. “Unless Indian mills can materially bring down their carbon footprint during the transition period, it can potentially lead to lower profits and a loss of market share in Europe."

The average emission intensity of Indian steelmakers is 12% higher than the global average for steel produced through the blast furnace route.

With CBAM not on the table for discussions, it could have a big impact on Indian steel exporters. India exported about 3.6 million tonnes of finished steel to Europe and 0.4 million tonnes to the UK in 2023, shows data from SteelMint. Cumulatively, this accounts for nearly half of India’s total steel exports.

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