The Carbon Border Adjustment Mechanism (CBAM), a measure through which the EU seeks to impose import tariffs on carbon-intensive products to prevent “carbon leakage”, could prove to be a major challenge for India’s exports of iron, steel, and aluminium, according to an analysis done by Delhi-based thinktank Global Trade Research Initiative (GTRI).

“The CBAM tax, between 20 per cent and 35 per cent, is far higher than the EU’s average import tariff of 2.2 per cent on manufactured products. High CBAM duties will make WTO and FTA-led zero duties meaningless,” said Ajay Srivastava, former Indian Trade Service officer and co-founder, GTRI.

The adverse impact will increase as the EU adds more products to the CBAM list. This will increase costs resulting in the loss of billions of dollars of exports, the report points out.

Major blow

The EU is set to launch the CBAM – which it defines as its landmark tool to put a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries In October 2023, it will be rolled out in four phases.

“From January 1, 2026, the EU will start collecting the carbon tax on each consignment of steel and aluminum, making Indian firms pay 20-35 percent equivalent of tariffs,” the report pointed out. It could be a major blow to Indian exports of metal, as about 27 per cent of exports of iron ore pellets, iron, steel, and aluminum products valued at $8.2 billion in 2022 went to the EU, it added.

CBAM also applies to electricity, fertilizer, hydrogen and cement, but India does not export these products to the EU.

“The EU will tax new products under CBAM from 2026 to 2034. By 2034, all goods and materials imported into the EU will be taxed under CBAM,” the report pointed out.

India’s report

India has already made a submission at the WTO raising concerns about the selective application of carbon border rules to trade-exposed industries such as steel, aluminium, chemicals, plastics, polymers, chemicals and fertilisers.

The report suggested that the government should set up a task force to prepare administrative ministries and industry to meet the CBAM challenge. The Ministry of Steel and Mines needs to educate all steel and aluminum firms to meet the Oct 1 deadline, it said.

The government should also factor the impact of CBAM in FTA negotiations with the UK and the EU. “Even if both countries agree to zero tariffs under FTA, CBAM will ensure that while EU goods enter India at zero tariffs, Indian goods will pay very high CBAM tariffs,” the report suggested.

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