Challenges of EU’s CBAM for India

Source: This post ‘Challenges of EU’s CBAM for India’, is based on the article The EU’s border tax poses major challenges for Indian businesses, published in Live Mint on 19^th August 2024.

UPSC Syllabus topic: GS Paper 3 -Environment – Climate Change and global warming

Context: European Union’s Carbon Border Adjustment Mechanism (CBAM), which mandates that all imports into the EU bear the same carbon cost as those produced within the EU.

CBAM will initially target six sectors—iron and steel, aluminum, cement, fertilizers, electricity, and hydrogen. It will have significant impacts for India, specifically in the aluminum and steel sectors.

The mechanism is designed to equalize the carbon cost between EU-produced goods and imports, potentially closing markets for high-carbon-footprint products from countries like India.

How will impact India’s steel and Aluminum sector?

Exports: The EU accounts for 27% of India’s aluminum and 38% of steel exports.

The CBAM’s current phase, which runs till 31 December 2025, will focus on detailed data reporting of both direct and indirect emissions.

Direct vs. Indirect Emissions: Direct emissions refer to those generated during the production process, while indirect emissions involve the electricity used during production. From 2026, CBAM will target direct emissions only.

Potential Tariffs: For aluminum, the impact of CBAM could range from 7-10% ad valorem duty. However, including indirect emissions could increase this impact to over 70%, due to the use of coal-fired electricity. It severely restricts Indian aluminum exports to the EU.

What are the challenges in front of India?

Ripple effect: Even though currently CBAM is in the reporting phase only, non-EU customers who are importing from India and exporting to EU after adding value to it, are demanding CBAM compliance declarations from Indian manufacturers.

Alternative energy sources such as hydro, gas and nuclear energy, and battery-storage options are not available yet.

Violation of WTO Rules: CBAM’s alignment with WTO rules is questionable, and there are concerns about how it might disrupt global trade norms.

Discriminatory provisions: The EU’s CBAM seems to be discriminatory. The CBAM penalizes imported goods by applying the EU’s own carbon pricing system to them. For example, even if two products (one produced in the EU and one in a country like India) result in the same amount of CO2 emissions, the product from India would face additional costs if the carbon price in India is lower than in the EU.

Reverse financing: “reverse financing” refers to a situation where developing countries, like India, end up indirectly supporting the EU’s carbon budget. It shifts the financial burden of climate action from developed countries (like those in the EU) to developing countries.

It remains to be seen how Carbon Credit Trading System (CCTS) system will align with CBAM requirements.

Data Privacy Concerns: The extensive emissions data required by the EU could expose sensitive business information, necessitating robust data protection measures.

FTA: The CBAM could undermine benefits from tariff reductions and market access under free-trade agreements that India is negotiating with the EU and the UK.