“India’s steel exports to the EU shall reduce by 24 per cent. This implies that the carbon tax burden falls on Indian firms, adversely affecting gains from exports to the EU,” ICRIER said in its report titled Carbon Border Adjustment Mechanism (CBAM): Impact on India’s Steel Exports to the EU and Carbon Tax Incidence.
Brussels fully implemented CBAM in January this year, which entails duty collection based on the reported carbon content of shipments entering the EU. The carbon tax currently applies to iron and steel, aluminium, cement, fertilisers, hydrogen and electricity.
After the rollout of CBAM, India’s iron and steel exports to the region recorded a 13 per cent decline in the following four months through April, according to the latest data available with the Department of Commerce.
“Fertilisers and aluminium products, followed by metal products, are next in line to be hurt the most (by CBAM),” the report said.
The impact on India’s export growth to the region is expected despite a free trade agreement (FTA). CBAM was a major sticking point and was the last issue to be resolved during negotiations between the two economies.
Under the FTA with Brussels concluded in late January, New Delhi has secured commitments for enhanced technical cooperation on the recognition of carbon prices and verifiers. The EU has also assured that it would extend flexibilities under CBAM to India if they are extended to any other nation in the future.
Additionally, the report flagged that CBAM is unlikely to yield the expected outcome of lowering emissions in the EU. “Carbon emissions are likely to increase in the EU by 0.29 per cent, not because European firms become dirtier, but because the CBAM shock is modelled as an import-tariff-equivalent shock on carbon-intensive imports, with the rise mainly a scale effect from increased domestic production in the EU,” the report said.
In conclusion, CBAM will adversely impact India’s trade with the EU and have a negligible effect on carbon emissions, according to ICRIER. “A reduction of 1 per cent in aggregate emissions will occur in the global steel industry,” the report said.
To offset the projected export losses, India must pursue a dual strategy of boosting export competitiveness and accelerating decarbonisation in the iron and steel sector in line with its Long-Term Low Emissions Development Strategy (LT-LEDS) and net-zero 2070 commitment, ICRIER recommended in its report.
On the carbon pricing front, India should also establish or strengthen domestic carbon pricing mechanisms, either through a domestic carbon tax or by leveraging the Carbon Credit Trading Scheme, the report said. “In parallel, India should actively advocate in international fora for a differentiated CBAM tax rate for developing economies.”
The European Commission has committed under the FTA that it would take into account India’s carbon trading system whenever New Delhi implements it in the future under its CBAM regulation.