EU carbon tax to face Indian scrutiny over WTO rules

A file photo of EU Commission headquarters in Brussels, Belgium (Photo: Reuters)
A file photo of EU Commission headquarters in Brussels, Belgium (Photo: Reuters)


Carbon Border Adjustment Mechanism (CBAM) move expected to impact exports worth over $8 billion to the EU from 2026

NEW DELHI : The government has begun ministerial consultation on the impact of the European Union’s carbon tax on Indian industry, including on the question of whether it could act as a barrier to trade, a government official said.

Starting 1 October, iron, steel and aluminium exports to the European Union from across the world will face added scrutiny after the European Parliament earlier this week passed the Carbon Border Adjustment Mechanism (CBAM).

The tax is expected to hit Indian exports worth over $8 billion to the EU from 2026.

Graphic: Mint
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Graphic: Mint

Under the measure, suppliers will have to report greenhouse gas emissions ‘embedded’ in their consignments before taxes are levied from 1 January 2026.

“We are in the process of evaluating the European Union’s CBAM and have started consultations at the ministry levels. We are doing sector wise analysis, and then we will look at where it will start acting at a non-tariff barrier. Then, we will address that. There are positive aspects of the CBAM too and some industries which are using green tech will benefit from it," the government official said.

Another official said that several green policies brought in by western countries, including CBAM and the US Inflation Reduction Act, aren’t World Trade Organization-compliant and are set to be challenged at the trade body.

“As far as CBAM is concerned, it will squarely impact all countries. Indian competitors in the EU market will also have to comply with the same rules so we need to see that as well,"

Mint had earlier reported that India is considering imposing retaliatory tariffs on European exports.

However Ajay Sahai, Director General of FIEO said, “Retaliatory taxes on CBAM would reflect badly on India as such environmental related measures such as these will continue to come up. Environment is a concern for everyone and efforts have to be made to take corrective action."

A Crisil report said the cost of India’s steel exports to the EU could rise as much as 17% following full implementation of CBAM, which mandates stringent disclosures and purchase of carbon credits to offset the impact of emissions.

“Accounting for greenflation, which will drive overall steel prices higher, the total impact could be as high as 40%. Under the mechanism, which the Council of the EU and European Parliament have agreed to implement from October 1, 2023, importing EU nations will seek quarterly disclosures across seven emission intensive sectors from April 2024, and to gradually penalize emission differentials between 2026 to 2034 through purchase of carbon credits to bridge the cost differential with steel produced in the EU," Crisil said in a report.

The EU move is part of a series of global emission-reduction measures implemented in recent years. Equally, India too is committed to reaching net zero by 2070.

Under the next UN COP27 meeting, targets will be made even more aggressive.

Under CBAM, exporters will need to make quarterly reporting of emissions starting 1 October. From 31 December, 2025, exporters will be able to buy Emissions Trading System (ETS) certificates for their greenhouse gas emissions.

In the absence of a carbon-neutral technology, industries have been allocated free allowance starting at 100% in 2025 and tapering down to 0% by 2034.

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