How Smart Grids Can Help India Meet EU’s Carbon Tax Standards

The European Union’s Carbon Border Adjustment Mechanism (CBAM), set to come into force in 2026, is a tax on imports with a high carbon footprint. Covering key sectors like cement, steel, aluminum, and fertilizers, CBAM aims to level the playing field between EU producers who adhere to stringent environmental regulations and foreign imports from countries with more lenient emissions standards. This tax, potentially ranging from 20% to 35%, could increase costs for India's export-driven industries, especially those heavily reliant on carbon-intensive processes.

The CBAM has been a sticking point in India's ongoing Free Trade Agreement (FTA) negotiations with the EU. As discussed in a previous post*, while the FTA promises to boost investments and enhance trade, the environmental stipulations of CBAM pose significant challenges. With Indian exports to the EU reaching $75 billion in FY24, making it our second-largest export destination, the stakes are high. The EU has suggested implementing a domestic carbon tax as an alternative to CBAM – while India can potentially reclassify some of its existing taxes to account for carbon pricing, other technological solutions can also help offset the impact.

By increasing the share of renewables from 20% to say 70-80% in a cement factory's power input, its indirect emissions could be dramatically reduced, potentially bringing emissions below the CBAM thresholds.

The Carbon Footprint of Cement

Industries like cement and fertilizers are at the heart of the CBAM challenge, since both direct and indirect emissions from these industries are subject to this tax. For instance, in cement manufacturing, total emissions typically involve the following:

Direct Emissions:

• Chemical reactions during calcination: ~50% of total emissions

Indirect Emissions – entails power consumption:

• Power consumption in the manufacturing process (electric kilns): up to 40% of total emissions
• Operational power consumption: ~10% of total emissions

If the electricity powering cement plants is derived from fossil fuels, this significantly adds to the industry’s overall carbon footprint. India's current power generation mix, with renewables constituting 22% and conventional sources 78%, significantly impacts these indirect emissions.

Smart Grids: A Near-Term Solution

One near-term solution to reduce the carbon footprint of industries like cement is to ensure that their input power is predominantly sourced from renewables. This can be achieved by commissioning smart grids for power transmission and distribution, which can be used to route renewable energy to these key sectors on a priority basis. By increasing the share of renewables from 20% to say 70-80% in a cement factory's power input, its indirect emissions could be dramatically reduced, potentially bringing emissions below the CBAM thresholds.

While the long-term transition to renewable energy is essential, utilizing smart grids and prioritizing distribution of renewable energy to such carbon-sensitive industries (ahead of households and agriculture) offers an interim solution to circumvent CBAM and maintain our export competitiveness.

#CBAM #EuropeanUnion #Carbon_taxes #Sustainability #ManufacturingIndustry #MakeInIndia #Exports #RenewableEnergy #SmartGrids #IndiaEUFTA #CarbonReduction #CementIndustry #CleanEnergy #GreenTransition

*Also see Unlocking Global Markets: India's Strategic Pursuit of Free Trade Agreements