Synopsis
The European Union’s carbon tax on imports poses challenges for India’s trade, particularly in the face of ongoing negotiations for a free trade agreement between the two regions.
Key Concerns for India
- Exposure to higher costs: Indian exports such as steel and aluminium will become 20-35% costlier in the EU market due to the proposed carbon tax.
- Impact on small and medium-sized enterprises (SMEs): The tax may disproportionately affect Indian SMEs, which could hinder their competitiveness in the global market.
- Climate change mitigation: India is concerned about the tax’s impact on its industries and the potential for carbon emissions to increase.
As the world grapples with the challenges of climate change, international trade is being influenced by growing efforts to introduce carbon taxes on imports under a Carbon Border Adjustment Mechanism (CBAM). The EU’s CBAM is designed to reduce greenhouse gas emissions by creating a level playing field for domestic and international producers.
The EU’s CBAM is set to impose full compliance and carbon costs on six carbon-intensive imports: iron and steel, aluminium, electricity, cement, fertilisers, and hydrogen, from January 1, 2026. These imports are valued at around $8 billion, and Indian exports account for 27% of the total iron, steel, and aluminium exports to the EU.
Indian exporters of carbon-intensive goods are using default values published by the European Commission as benchmark figures during the CBAM transition phase. However, concerns have been raised about the tax’s potential to increase carbon emissions and the impact on Indian industries.
Opportunities for India
On the other hand, a free trade agreement between India and the EU could present opportunities for growth, development, and green jobs. The agreement could boost exports in key sectors such as textiles, leather, pharmaceuticals, automobiles, IT services, and agriculture.
India can also emerge as a key voice for the developing world in climate governance by promoting tech transfer, establishing a climate fund to support decarbonisation, and advocating for phased, equitable implementation of CBAM-like policies.
A successful green transition will hinge on access to advanced technologies, climate finance, and incentives for the private sector to adopt clean energy and produce green steel, cement, and other materials.
Addressing the CBAM Barrier
India must develop scientific, sector-specific tools for reliable measurement of embedded emissions based on actual data. It must also establish a domestic carbon-pricing mechanism to assign a financial value to the carbon content of goods.
A long-term strategy is essential for a successful green transition, which will require access to advanced technologies, climate finance, and incentives for the private sector to adopt clean energy.
One suggestion to neutralise CBAM is to introduce a domestic carbon tax that could be offset against the EU’s CBAM under a double-taxation avoidance framework.
| Benefits of introducing a domestic carbon tax | Revenue source for financing green initiatives | Aligns with India’s trade interests and climate commitments |
| Challenges of introducing a domestic carbon tax | Implementation complexity | Potential for increased costs for consumers |
Conclusion
Addressing the EU’s carbon tax on imports poses a significant challenge for India’s trade. However, it also presents opportunities for growth, development, and green jobs. A successful green transition will require a long-term strategy, access to advanced technologies, climate finance, and incentives for the private sector to adopt clean energy.
India can emerge as a key voice for the developing world in climate governance by promoting tech transfer, establishing a climate fund to support decarbonisation, and advocating for phased, equitable implementation of CBAM-like policies.
**Key Points:**
• The EU’s carbon tax on imports poses challenges for India’s trade, particularly in the face of ongoing negotiations for a free trade agreement between the two regions. • The tax may disproportionately affect Indian SMEs, which could hinder their competitiveness in the global market. • A successful green transition will require access to advanced technologies, climate finance, and incentives for the private sector to adopt clean energy. • India can emerge as a key voice for the developing world in climate governance by promoting tech transfer, establishing a climate fund to support decarbonisation, and advocating for phased, equitable implementation of CBAM-like policies. • A domestic carbon tax could be introduced to neutralise CBAM, providing a revenue source for financing green initiatives and aligning with India’s trade interests and climate commitments.
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