Impose Carbon Tax In India To Handle CBAM Issue: CSE

Impose Carbon Tax In India To Handle CBAM Issue: CSE

A new report from New Delhi-based think tank Center for Science and Environment (CSE) said that the developing countries might consider imposing carbon tax and other measures on their own to tackle the issue of the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM). This comes at a time when the EU has planned to impose a 25% tax on energy-intensive goods exported from India to the European Union (EU) starting in 2026. Having an ETC or Emissions Trading System internally like the EU will help keep the taxes within the country, and allow firms to avoid CBAM-linked costs. This is because the cost of carbon credits, as seen in the case of China, can be a 10th of EU costs in developing countries like India. Making the case for imposing such costs domestically rather than having exporting firms suffer higher taxes under the EU CBAM.  

Presently, the potential tax on exports to the EU would be 0.05% of India’s GDP, as highlighted in the CSE report titled ‘The Global South’s Response to a Changing Trade Regime in the Era of Climate Change.’ One of the key recommendations of the report is the imposition of a Carbon tax for India. 

“The country, say India, may consider a domestically collected carbon tax at the point of exports. Rather than subjecting industries to the tax imposed by the EU, it could institute a domestic carbon tax specifically targeting exports of CBAM products destined for the EU market or any country imposing a carbon border tax,” the CSE report read. 

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India’s Total Export To CBAM

Based on the data from the past three years i.e., (2021-22, 2022-23, and 2023-24), the report details the EU’s plan to tax imports of energy-intensive products such as iron, steel, cement, fertilizers, and aluminum, based on the carbon emissions generated during their production. The EU asserts that this mechanism will create a level playing field for domestically manufactured goods, which must comply with stringent environmental standards, while also helping to reduce emissions from imports.

However, this move has raised concerns among developing countries, which argue that it could harm their economies and make trade with the EU prohibitively expensive. The CBAM has also sparked debates at multilateral forums, including UN climate conferences, where developing nations contend that under UN climate change rules, no country should dictate how another reduces emissions. Trade observers acknowledge that CBAM is, at the end of the day, more a form of non-tariff barrier to imports and to protect domestic industry in Europe than a genuine effort to mitigate emissions.  

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Avantika Goswami, head of CSE’s climate change program, noted that India’s exports of CBAM-covered goods to the EU accounted for 9.91 percent of its total exports to the bloc in 2022-23. She highlighted that 26 percent of India’s aluminum and 28 percent of its iron and steel exports were destined for the EU in the same period. These sectors form a significant part of the CBAM-covered goods exported from India to the EU.

In 2022-23, exports of CBAM-covered goods to the EU made up about 25.7 percent of India’s total exports globally, underscoring the importance of these sectors. Notably, India does not currently export hydrogen and electricity to the EU. Overall, CBAM-covered goods exports to the EU constitute approximately 1.64 percent of India’s total global goods exports. The implementation of the CBAM represents a significant challenge for India’s export economy, particularly for its energy-intensive industries, and highlights the ongoing global debates around fair trade and climate change responsibilities.

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