EU suggests India implement own carbon tax mechanism, says minister Goyal

New Delhi: Amid ongoing free trade agreement (FTA) negotiations, the European Union (EU) has suggested that India create its own carbon tax mechanism instead of paying into the EU's Carbon Border Adjustment Mechanism (CBAM), commerce and industries minister Piyush Goyal said on Tuesday. 

"They (EU) are very keen to pursue that and they have offered that India could, instead of paying CBAM tax to the EU, devise its own mechanism," Goyal said. "We will consider their suggestion and come up with whatever is good for the Indian industry and for the people of India," he added.

The CBAM is a tariff on carbon-intensive imports such as steel, cement, and certain electricity products entering the EU. It aims to promote cleaner industrial production practices in non-EU countries. 

As part of the European Green Deal, CBAM will take effect in 2026, with reporting requirements beginning in 2023. A report by the economic think tank Global Trade Research Initiative (GTRI) estimates that the CBAM could impose a 20-35% tax on specific imports into the EU starting 1 January 2026. This will impact companies in seven carbon-intensive sectors, including steel, cement, fertilizers, aluminium, and hydrocarbons. Notably, about 27% of India's exports of iron ore pellets, iron, steel, and aluminium products are destined for the EU, with exports totalling $7.4 billion in 2023.

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"My thinking is that the CBAM will hurt the EU very badly. Their infrastructure, their cost of living, their industrial products, their consumer products -- will become expensive and their economy will face further distress," Goyal added.

Meanwhile, the minister dismissed speculation about India supporting Chinese investments in the country, following suggestions in the latest Economic Survey to consider foreign direct investments (FDI) from China. The survey recommended leveraging the China-plus-one strategy to boost exports amidst global shifts.

"The chief economic adviser's report (latest economic survey) speaks about new ideas. It is not at all binding on the government," Goyal clarified. “There is no rethinking on supporting Chinese investments in the country.”

The domestic industry, particularly sectors using Chinese plants and equipment, has urged the government to relax FDI restrictions, citing technical and operational challenges due to visa restrictions for skilled Chinese workers. However, experts warn that allowing Chinese firms to establish a significant presence in India could pose risks.

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"While Chinese companies investing in India and exporting to Western markets might seem beneficial in the short term, it risks undermining India's long-term economic security and strategic autonomy," said Ajay Srivastava, founder of GTRI. "Dependence on Chinese firms for key manufacturing capabilities could expose India to supply chain vulnerabilities and geopolitical risks," he added.