How does Europe’s Carbon Tax affect India?

As climate change becomes an increasingly urgent global issue, countries worldwide are stepping up their efforts to reduce carbon emissions. One of the most ambitious and far-reaching measures taken in this regard is the European Union's (EU) Carbon Border Adjustment Mechanism (CBAM). This new carbon tax, set to be fully implemented by 2026, is set to have significant implications for global trade—and particularly for India's export-heavy industries. In this article, we explore how the EU’s CBAM will affect India, its industries, and the country’s broader economic and political landscape. The Carbon Border Adjustment Mechanism (CBAM) is a new policy introduced by the European Union designed to address “carbon leakage.” Carbon leakage occurs when companies move their operations to countries with less stringent environmental regulations to avoid higher carbon taxes. To prevent this, the EU plans to impose a carbon tax on imports of carbon-intensive goods, such as steel, aluminium, cement, fertilizers, and electricity.

Under CBAM, goods imported into the EU from countries outside its borders will be taxed based on the amount of carbon emissions produced during their production. This tax will mirror the cost that EU-based companies face under the EU’s existing Emissions Trading System (ETS), where they must buy carbon credits to offset their emissions. The goal of CBAM is to level the playing field by ensuring that foreign companies are subject to the same environmental standards as European businesses, preventing the incentive to relocate production to low-regulation countries. For India, this new carbon tax presents a significant challenge. The country is a major exporter of carbon-intensive goods, particularly in sectors like steel, iron, aluminium, and cement—industries that are heavily reliant on coal and other fossil fuels. According to recent statistics, in 2022, 27% of India's steel, iron, and aluminium exports, valued at approximately $8.2 billion, were sent to Europe. These sectors are expected to face higher costs under the new tax, making their goods less competitive in the European market.

Take steel, for example. Indian steel production, like that of many developing countries, relies heavily on coal-based technologies such as blast furnaces. These methods are carbon-intensive, meaning that Indian steel exporters, such as JSW Steel and Tata Steel, will need to buy CBAM certificates to offset the carbon emissions generated during production. Since India does not yet have a carbon pricing system like the EU, the additional cost of these certificates will make Indian steel more expensive in Europe, thus reducing the competitiveness of Indian exports. The financial burden of CBAM could result in a reduction of Indian exports to the EU, with some estimates suggesting a potential 10.5% drop in exports of carbon-heavy goods like steel, aluminium, and cement. For Indian companies that already face rising costs due to factors like inflation and fluctuating commodity prices, the added expense of CBAM could pose a serious challenge.

The EU’s carbon tax may catalyze change in India’s industrial practices, but the road to a greener future is fraught with challenges. While Indian companies like JSW Steel are already investing in cleaner technologies such as green steel production, the shift away from coal-based technologies will require significant investments. The transition to greener production methods, such as using hydrogen-based steel production, is costly and will take time to implement. Many Indian industries, particularly steel and cement, remain reliant on carbon-intensive processes, and the abrupt introduction of CBAM could put them at a disadvantage compared to European companies that already have more advanced technologies in place.

For India to effectively compete in the global market while meeting its climate goals, the country will need substantial investments in renewable energy, clean technologies, and infrastructure. However, India has limited access to international climate finance and technology transfers, which makes this transition particularly challenging. The country has estimated that it will need around USD 28 billion per year to meet its net-zero target by 2070, but international funding has largely been insufficient. This financial gap exacerbates the difficulties Indian industries face as they work to reduce emissions and align with global climate goals.

References:

1.?????? The Economic Times - EU's carbon tax could cost India 0.05 per cent of GDP: Report

2.????? Reuters - India sees EU carbon tax proposal as unfair and not acceptable, official says

3.????? Image by storyset on Freepik