India’s Carbon Tax Response to CBAM Raises Concerns for EU Manufacturing

The European Union’s proposed Carbon Border Adjustment Mechanism (CBAM) has stirred controversy, with India’s Commerce and Industry Minister strongly criticizing it as “ill-conceived.”

Understanding the Carbon Border Adjustment Mechanism (CBAM)

• Proposed by the European Union (EU): The EU aims to reduce carbon emissions from imported goods and prevent competitive disadvantages against countries with weaker environmental regulations.

Objectives

• • Reduce carbon emissions from imported goods.
  • Promote a level playing field between the EU and its trading partners.
  • Protect EU companies that have invested in green technologies.

How CBAM Works

• • Coverage: Applies to imported goods that are carbon-intensive.
  • Integration: Integrated with the EU’s Emissions Trading System (ETS), which currently covers industries like power generation, steel, and cement.
  • Implementation: CBAM taxes imposed on the carbon content of imported goods at the border, based on the carbon price in the EU ETS.
  • Exemptions: Possible exemptions for countries with comparable carbon pricing systems.
  • Revenue Use: Revenue generated from CBAM taxes could fund the EU’s climate objectives, including climate-friendly investments and support for developing countries’ climate efforts.

Impacted Parties under CBAM

• Countries: Non-EU countries exporting carbon-intensive goods to the EU, including India.
• Items Covered: Initially includes iron and steel, cement, aluminum, fertilizers, and electric energy production.
• Scope Expansion: The CBAM may extend to cover other sectors in the future.

Advantages of CBAM

• Encourages non-EU countries to adopt stringent environmental regulations, reducing global carbon emissions.
• Prevents carbon leakage by discouraging companies from relocating to countries with weaker environmental regulations.
• Generates revenue for supporting EU climate policies.

Challenges and Concerns with CBAM

• Difficulty in accurately measuring carbon emissions of imported goods, particularly for countries lacking comprehensive carbon accounting systems.
• Potential for trade tensions with the EU’s trading partners, especially if retaliatory measures are implemented.

Consequences for EU Manufacturing

• The European auto sector, particularly steel and aluminum usage, could be severely affected by CBAM.

• Opportunity for India: India sees this as an opportunity to develop a robust auto sector, leveraging cost advantages in the global market.

India’s Response and Carbon Tax Strategy

• Counteractive Measures: India plans to neutralize the impact of the EU’s carbon tax by imposing its own.

• Investing in Green Energy: Revenue from India’s carbon tax will support the country’s green energy transition, helping exporters shift to cleaner energy and reduce their carbon footprint.

• Negotiations with EU: The Indian government is engaged in dialogues with EU counterparts regarding the levy’s fairness and pricing disparities.

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