EU Carbon Tax impact on India: In a new report that indicates that the European Unions Carbon Border Adjustment Mechanism (CBAM) will impose a 25% tax on energy-intensive goods exported from India to the EU. This tax is expected to cost India approximately 0.05% of its GDP, as detailed in a report titled The Global Souths Response to a Changing Trade Regime in the Era of Climate Change, published by the independent think tank, Centre for Science and Environment (CSE).Scope of CBAM on Indian exportsData from the past three years (2021-22, 2022-23, and 2023-24) suggests that CBAM-covered goods account for only about 1.64% of Indias total global exports. The mechanism specifically targets energy-intensive products like iron, steel, cement, fertilizers, and aluminum produced in countries such as India and China. It is based on the carbon emissions generated during the manufacturing of these goods.The EU contends that CBAM levels the playing field for domestic products, which are subject to stricter environmental regulations, while also aiming to lower emissions from imported goods. However, many developing nations, including India, are concerned that this policy could stifle their economies and complicate trade with the EU.Sitharaman calls CBAM unilateral and arbitraryFinance Minister Nirmala Sitharaman has criticized the EUs CBAM, labeling it unilateral and arbitrary. She warns that the mechanism could adversely affect Indias exports in crucial sectors like steel and cement once it takes effect in 2026. Despite these concerns, negotiations on a Free Trade Agreement (FTA) with the EU are expected to proceed.Sitharaman stated, “This border tax introduced by the EU will create trade barriers,” during her speech at the Energy Transition Summit organized by the Financial Times. She also mentioned that India has consistently expressed its concerns to the EU and is exploring options to mitigate transaction costs.What will bet the economic implications for IndiaThe implementation of CBAM may threaten the profitability of Indian exporters, as the EU is one of Indias primary export markets. In the 2023-24 fiscal year, Indias total trade with the EU reached USD 137.41 billion, with exports amounting to USD 75.93 billion and imports totaling USD 61.48 billion.This decision has ignited discussions at various multilateral forums, including UN climate conferences, where developing countries argue that emissions reduction mandates should not be imposed unilaterally.How much various sectors will be affectedAvantika Goswami, who leads CSEs climate change program, noted that CBAM-covered goods accounted for 9.91% of Indias total exports to the EU in 2022-23. Notably, 26% of Indias aluminum and 28% of its iron and steel exports were destined for the EU during the same period. In 2022-23, exports of CBAM-covered goods to the EU constituted approximately 25.7% of Indias total goods exports globally, underscoring the significance of these sectors for Indias economy.Currently, India does not export hydrogen or electricity to the EU, but the impending CBAM raises significant challenges for the industries involved.
